Increase in National Insurance or Social Care Levy

Accountants are warning that the increase in National Insurance contributions for businesses could discourage the creation of new jobs and potentially put some at risk, while the individual tax burden is at its highest for decades.

Under measures announced yesterday by the prime minister Boris Johnson, a new social care levy will see the introduction of a 1.25% hike in National Insurance rates for employees and employers, effective from April 2022, set to raise £12bn a year, of which £600m will be generated by an increase in the dividend tax rate.

Paul Dickson, CEO and managing partner at Armstrong Watson, said: ‘This increase in national insurance will have a big impact on business. It is effectively a tax on businesses for employing people. It will create a significant additional burden at a time when they will be dealing with the aftermath of the pandemic.

‘Not only are businesses trying to navigate out of the economic fallout of the pandemic, but they are also facing greater costs, and now they are being hit with a tax because they employ people. There is no correlation to profits. If a business was making more profit, then I think increasing tax by 1.5% would be more bearable, but it isn’t, this announcement taxes businesses based on their salary bill.

‘This increase in NIC will discourage the creation of new jobs and will potentially put some positions at risk. The government should be looking at how they can support businesses to create jobs, thereby creating more wealth to be taxed.’

The increase sees the NICs’ bill for companies increasing significantly with employer NICs’ rate now hitting 15.05% in employment related taxes.

John Cullinane, director of public policy for the Chartered Institute of Taxation (CIOT), explained: ‘National insurance contributions (NICs) are a tax on income but they are not the same as income tax. This has implications for how different groups are affected.

‘For example, NICs affect employed people differently from self-employed people. At 9% the main rate of NICs for self-employed people is 3% lower than that for employed people. In effect adding 1.25% to each figure, will not change that gap.
‘But that 3% differential is dwarfed by the 13.8% cost of employers’ NICs, levied on wages paid to employees but not on payments made to independent contractors. This will rise to, in effect, 15.05%, amounting to an increase in the total tax burden on employment of 2.5% of income compared to just 1.25% for self-employment.’

When the pandemic started, the Chancellor indicated that his long-term aim was to align the tax liability and national insurance rates between employed and the self-employed, which may be addressed in the Autumn Budget in October.

John Sheehan, partner at UHY Hacker Young, said: ‘We expect the rise in National Insurance will increase differences between employment and gig economy taxation. As a result, employers may be encouraged to make more use of self-employed workers, while shifting away from employees.

‘The government has made the point in the past that it would work on closing the gap between taxation of the employed and self-employed, however, its latest tax increase will have done the opposite.’

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: ‘A levy of 1.25% on employee earnings and on employer wage costs (so a 2.5% overall increase in the tax rate on earnings), will raise £12bn a year. The extension of this levy to those over state pension age and to dividends is welcome, but this remains a tax which will be overwhelmingly borne by workers with very little coming from pensioners. This continues a trend seen over many decades of the burden of tax being shifted towards earnings. The creation of an entirely new tax will mean yet more quite unnecessary complexity.’

Amanda Tickel, head of tax policy at Deloitte UK, said: ‘The planned increases of 1.25% in national insurance rates and dividend taxation from 2022, are expected to raise £12bn a year - more than the total tax raised by all capital gains taxes. This will have the desired impact in paying for social care. 

‘It will, however, also increase the cost of employment further and when added to the tax rises announced in the March Budget, result in the highest ever sustained tax level in the UK.

‘HMRC now need to work out how to collect the levy from those above pension age who are not currently paying NI through the PAYE system, as well as looking at how ring fencing this tax to a particular cause will work in practice. This could be a complex and costly exercise and explains why some of the measures are deferred until 2023.’

The latest announcement sees the tax burden reach its highest level for decades. Isabel Stockton, a research economist at the IFS, said: ‘Following just six months after the March Budget, itself the biggest tax-raising Budget since Norman Lamont’s 1993 Spring Budget, these announcements push taxes to their highest-ever sustained share of the economy. Equivalently, government spending is set to reach a record peacetime level. Long-term challenges around rising costs of health and social care means this increase in the size of the state is likely here to stay.’

This also represents a further complication of the tax system. Cullinane said: ‘The new health and social care levy, by being established separately from National Insurance, and with slightly different rules, represents a further complication of the tax system.

‘The initial year in which national insurance will be raised will enable HMRC to build the systems to collect the levy. It Is hard to avoid seeing this as a diversion of scarce IT and other resources at a time when HMRC’s services to taxpayers and their agents are under severe strain. Presumably the government preferred to pay this price for the appearance of creating a new tax rather than of increasing rates of an existing one.’

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