Boris Johnson’s announcement today that health and social care reform will be funded through a 1.25 percentage point increase in national insurance has been branded a ‘tax on jobs’ by employer groups.
The government’s much-anticipated “health and social care levy” will see a 1.25 percentage point rise in both employers and employees’ national insurance contributions (NICs) from April 2022, with the same increase in share dividends tax.
The prime minister said this increase would raise almost £36bn over the next three years, with money going directly to health and social care across the UK. “This won’t be pay awards for middle management, it will go straight to the front line at a time when we need to get more out of our health and social care system than ever before,” he said.
Laying out the plan, the prime minister explained why government is not increasing income tax or capital gains tax instead. “Income tax isn’t paid by businesses, so the whole burden would fall on individuals, roughly doubling the amount that the basic rate taxpayer could expect to pay, and the total revenue from capital gains tax amounts to less than £9 billion this year.
“Instead our new levy will share the cost between individuals and businesses, and everyone will contribute according to their means, including those above state pension age, so those who earn more will pay more.”
He said that the highest earning 14% will pay around half the revenues, those earning less than £9,568 will not pay, and the majority of small businesses will be protected with 40% of all businesses “paying nothing at all”.
National insurance and tax
Neil Carberry, chief executive of the Recruitment and Employment Confederation (REC), said it was yet more tax on business, particularly on some of the most struggling sectors.
“It’s vital that the social care system is properly funded – this has been a long time coming,” he said. “But the 1.25 [percentage point] rise in national insurance, the UK’s biggest business tax, is the wrong choice.
“As a tax on jobs, and a tax on activity rather than profits, rising national insurance will fall more heavily on the labour intensive sectors most affected by the pandemic.
“It also disproportionately affects lower earners. The accompanying rise in taxes on dividends will also hit small limited company directors, who were denied any support during the pandemic. We all agree that social care needs more funding, but increasing labour taxes as we try to recover from the pandemic is not the fairest way to do it.”
Joanne Frew, head of employment at law firm DWF, said: “National insurance represents a flat cost across the business, regardless of profitability and with this increase, many employers will think twice before taking on extra staff. Whilst it was always predictable that the cost of the pandemic would need to be paid for, employers certainly need a longer period of grace in order to recover from the impact of the past 18 months.”
Andrew Brookes, senior tax manager at the accountancy firm Menzies, said: “Many workers and employers are willing to pay higher NICs, if it is clear to them what they are getting for it – in this case a social care system that is fit for purpose.
How much are NICs?
Employers currently pay 13.8% NICs for employees’ earnings over £170 per week. This will rise to 15.05% from April 2022.
Employees pay 12% NICs on earnings between £180 and £967 per week, but 2% thereafter. From April 2022, these proportions will be 13.25% and 3.25%.
The above amounts apply to Category A employees. Different amounts apply to other categories, for example for under-21s, apprentices, and employees over state pension age. Arrangements are different again for the self-employed.
“However, the government should ensure that the system is fair. For example, under the current proposals, as the NIC rate drops from 12% to 2% for higher paid workers on earnings over £50,000pa, they could end up paying less proportionately than lower paid workers. In addition, pensioners will pay nothing at all, regardless of whether they receive pay for their employment.”
Groups representing self-employed workers also attacked the plans. The Association of Independent Professionals and the Self-Employed (IPSE) warned that after the financial damage of the pandemic, the government’s new dividend tax hikes are making it “almost impossible” to be a freelancer working through a limited company.
ISPE’s director of policy Andy Chamberlain said: “After the financial damage of the pandemic, exclusion from support and the changes to IR35 taxation, this new tax hike on dividends will make it almost impossible for freelancers to continue to work through a limited company. To limited company directors – from project managers to graphic designers – this is salt in a year of wounds.”
Seb Maley, CEO of specialist tax adviser for contractors Qdos, commented: “Once again, it seems that the smallest businesses are bearing the brunt of tax reform. Yet still, it will be the flexibility, dynamism and skills of the independent workforce that the government needs most to speed up the economic recovery.
“The national insurance tax hike will hit employers too, pushing up the costs of hiring workers on the payroll. It goes without saying that this could stifle employment growth. With this in mind, businesses that have needlessly forced their contractor workforce inside IR35 or insisted they work PAYE in response to IR35 reform should rethink this decision immediately.”
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