In recent times, the rate of workers’ National Insurance has risen. The changes came into force on 6th April 2022 as the UK government increased employees’ NI by 1.25%. This means that employees, employers, and self-employed workers now pay 1.25p more for every pound.
On 5th April 2023, the National Insurance is set to go back to its habitual rate. Instead, the additional tax will be cashed in as a so-called ‘Health and Social Care Levy’.
Elliott Smith, co-founder of Love Your Employees, the UK’s first employee benefits and well-being marketplace, says that the move comes at a challenging time for people. “The National Insurance increase arrives at a financially difficult moment for households,” Smith comments. “Alongside the inflation and the rising costs of utility bills, the new tax will impact even further the pockets of millions of workers across the UK.”
Here, a couple of obvious questions spring to mind: how exactly will a higher National Insurance rate affect the average employee? And what are the reasons behind the tax rise on people’s wages?
National Insurance increase: what about the employees?
As mentioned, all workers have seen a 1.25% rise in their National Insurance contributions.
Before 6th April 2022, most British workers paid 12% of their yearly income in National Insurance. This rate applied to the earnings between £9,568 and £50,270 of those employees. Following the tax increase, this portion of UK workers will now have to deposit 13.25% of their salary. Likewise, people taking home an annual wage over £50,270 will have to pay 3.5% over this threshold, rather than 2%.
As things stand, the new NI rate affects anyone with a salary of at least £9,880, but this will soon change. In fact, from July the threshold will be raised by around £3,000, and only employees earning a minimum of £12,570 per year will be taxed. This also means that the first £12,570 people earn, as of July 2022, will be free of National Insurance.
So how is the new rate going to impact taxpayers’ earnings in the next twelve months? Combining the aforementioned measures, workers will witness a considerable change in their expenses – and they are not adverse to everybody. Employees who earn less than £34,000 per year will actually pay less National Insurance than they did prior to April 2022.
In this respect, for instance, a worker with a £20,000 annual salary will save £178 on their National Insurance between April 2022 and April 2023. If an employee earns £30,000 per year, they will pay £53 less than they did the last year.
Conversely, people with greater salaries (over £34,000 per year) will end up paying more than they used to. Somebody on a £50,000 yearly wage will deposit an extra £197, whereas those on a £100,000 annual pay will see their National Insurance increase by £822.
Smith pinpoints that, in this scenario, salary sacrifice may aid workers who are paying a high NI rate. “Salary sacrifice gives employees the chance to contribute to their pension from their gross pay,” the co-founder of Love Your Employees explains. “This means that you are being taxed at a lower level of salary.
“Hence, salary sacrifice can mitigate costs for both businesses and workers. Not only will companies decrease their National Insurance contributions, but they could also increase how much their employees take home every month.
“If you need support, Love Your Employees is happy to help businesses and their people tackle the increasingly rising costs of living.”
From April 2023, however, National Insurance contributions will return to their previous rates. The extra money will be collected as a separate tax (‘Health and Social Care Levy’) to help fund the country’s health and social care. This specific levy – unlike the NI – will also be paid by working state pensioners.
What will the increase in NI go towards?
The main drive behind the change in National Insurance rates, as well as the future introduction of the Health and Social Care Levy, is to actively support Britain’s public healthcare sector.
First of all, the roughly £12b collected from the 1.25% increase will be invested to ease pressure on the NHS. Then, a percentage of the money will be devolved to the UK’s social care system, with the pressing priority to aid older people who require substantial care needs. From taking medication and eating to washing and dressing, the contributions will help vulnerable citizens carry out their basic daily tasks.
What’s more, depending on the value of people’s assets, the government will spend additional money to cover general care costs. Anyone in England with a home, savings, and investments that are worth less than £20,000 will have their care funded completely by the state. Those with assets valued between £20,000 and £100,000 will also receive state support but are expected to contribute towards their own costs too.
Furthermore, from October 2023, the government will introduce an £86,000 care cap. This means that, in England, there will only be a certain amount of money you will need to spend to look after your personal care over the years. As for Scotland, Wales, and Northern Ireland, they are expected to receive £2.2b to spend on their own social and health care. Each respective government will have the chance to set its rules, deciding how to distribute the extra money autonomously.
This is all you need to know about the new National Insurance rates. How will you and your employees be affected? We hope this article offers you the information you require.