National Insurance as we all know is a tax on earnings that is paid by both, employees and employers, also paid by the self-employed on their profits. This tax was introduced in 1911 to fund social care in England.
This tax will see an increase of 1.25 per cent from April 2022, as a part of UK's Prime Minister Boris Johnson's plan to raise billions in funding for health and social care to help the NHS recover after the pandemic. The question however is, how will it affect the younger workforce, the lower-paid, and the self-employed? It has attracted its fair share of criticism.
This increase of 1.25 per cent will affect all, that includes the self-employed, employees and employers across the UK, starting from April 2022.
Also read: How is National Insurance calculated in the UK?
However, from April 2023, this tax will take a new form in the name of the "Health and Social Care levy", which will also be paid by state pensioners who are working.
How will this change affect small businesses and the self-employed?
The pandemic has already done enough damage financially and otherwise, and any extra burden (no matter how small it is) would be a blow to businesses. This fee hike would make everything a bit more expensive for small businesses, especially hiring new staff, since employers pay a percentage of National Insurance for employees, depending on the employee earnings.
| National Insurance | Initial Rate | Higher rate (above £50,270 a year) |
|---|---|---|
| Current rate (2021/22) | 9% | 2% |
| National insurance rate 2022/23 | 10.25% | 3.25% |
| Health and social care levy (2023/24) | 9% (1.25%) | 2% (1.25%) |
This increased rate would overburden the self-employed and have a significant impact on their take-home pay because the rate is based on their income after business expenses. This hits hard especially at a time when people are trying to get back on their feet.
Those who earn less than £9,564 would not be required to pay National Insurance or the new levy. Having said that, National Insurance contribution is compulsory for those who are 16 years or above and earning over £184 a week or if you are self-employed and making a profit of £6,515 or more a year.
We sought inputs from industry experts, and this is what Andrew Trodden of Umbrella Company UK had to say, "It's no surprise to see Boris Johnson announce a rise in National Insurance rates. The coronavirus pandemic has wreaked havoc on the UK's economy. However, what is disappointing is the impact this will have on contractors, freelancers and temporary workers. Yet again, it seems as if the government hasn't considered the UK's temporary workforce at all."
"Umbrella company employees will see a slight reduction in their pay retention due to the increased Employee's and Employer's National Insurance Contributions they're required to make. Not only is this a difficult pill to swallow for seasoned umbrella employees, it's another blow to those who used to operate through a personal service company but have had to seek an umbrella due to off-payroll legislation changes. And, let's not forget the lack of support limited company contractors had during the pandemic. The government should be doing more to protect the self-employed and not hinder them", he concluded.
It's worth mentioning that, as per the government, no one will be required to pay more than £86,000 for social care in their lifetime under reforms with effect from October 2023.
This social care reform will apply only to England but the extra income generated from this levy will be distributed from Westminster to Scotland, Wales and Northern Ireland.
One interesting thing this National Insurance hike brings with it is that those who earn above £50,000 are taxed at a rate of 2%, meaning they would be the least affected ones.
We would like to hear your thoughts and comments on the upcoming National Insurance hike. Please feel free to drop your inputs on [email protected] or on Social Media.