Last September, the prime minister, Boris Johnson's social care plan was announced. Part of the plan proposed that Class 1 National Insurance contributions paid by employees would rise by 1.25% from 12% to 13.25% to fund the social care system in England in a bid to end the "unpredictable and catastrophic costs" faced by many.
The rationale was to implement a social care package to fund tackling the NHS backlog which the prime minister described as "the biggest catch-up programme" in the NHS's history. The increase in National Insurance contributions which came in to effect from April 2022 is expected to raise around £12bn, of which part will be allocated to the other countries of the UK. National Insurance is a UK wide tax, reserved to Westminster signifying it is not a devolved tax. Therefore, any contribution from the increased revenue given to the devolved administrations of Scotland, Wales and Northern Ireland must be used to fund social care costs in those countries and cannot be used for any other purpose.
An increase in the primary threshold for National Insurance contributions
In the Spring Statement in March 2022, the then Chancellor of the Exchequer, Rishi Sunak, announced that from 6 July 2022 there would be an increase in the primary threshold, the level at which an employee becomes liable to pay Class 1 National Insurance contributions, as part of the Government's measures to assist in reducing the cost of living. The increase has been aligned with the UK personal allowance, so has risen from the original primary threshold of £9,880 per year up to £12,570.
Rishi Sunak stated "This will help almost 30 million working people, with a typical employee benefitting from a tax cut worth over £330 in the year from July." It is also estimated that due to this change, 2.2 million people will avoid paying any National Insurance. This would apply to anyone earning less than £12,570, and as this is also the current UK personal allowance for income tax, those earning less than £12,570 would not pay income tax either.
National Insurance and State Pension
It should be noted that National Insurance contributions are required to access a State Pension and it may be for some employees, eliminating the need to pay National Insurance contributions due to the increase in the primary threshold, will result in gaps in their National Insurance record. It is possible, however, to fill these gaps by making Class 3 Voluntary contributions, currently £15.85 per week or by way of an entitlement to National Insurance credits.
National Insurance saving or paying more?
For those earning up to circa £40,000, there is still a potential National Insurance saving from the change implemented on 6 July 2022 but higher earners will continue to pay more in the way of National Insurance.
Other National Insurance and dividend tax changes
Also as part of the new Health and Social Care Levy, there have been changes implemented for the other classes of National Insurance which affect employers and the self-employed. In addition, the rates of tax on dividends have also been increased by 1.25%, mainly to align owner managed businesses who remunerate owners through dividends.
If you require assistance with your own personal tax matters, please do not hesitate to get in touch.