How will NIC increases to pay for health and social care affect you?

Date: 12/09/2021
Author: GoSimpleTax
Company: GoSimpleTax

Boris Johnson wins Commons vote: Social care tax rise.

MPs voted 319 to 248 last week for a 1.25 percentage point rise in National Insurance for workers and employers to help fund health and social care.

From 6 April 2022, National Insurance contributions (NICs) for employees and employers will rise by 1.25 percentage points, as part of a new annual £12bn healthcare levy announced by Prime Minister, Boris Johnson, which he described as “reasonable and fair”.

Small-business organisations disagree and they haven’t welcomed the manifesto promise-breaking tax increase. However, the government says the increase in NICs and other measures are needed to tackle the “health backlog caused by the Covid pandemic”. Moreover, some of the money (reportedly £5.4bn over the next three years) will be used to improve the UK social care system, according to the government.

From 2023, the additional payment will become a separate tax on earned income called the Health and Social Care Levy, which will be calculated in the same way as National Insurance and detailed on payslips.

So what will it mean for sole traders?

Critics have been quick to point out that the increase in NICs will disproportionately affect lower earners and sole traders.

Sole traders pay two types of National Insurance: Class 2 (£3.05 a week) if their profits are £6,515 or more a year; and Class 4 if their profits are £9,569 or more a year.

Sole traders pay 9% Class 4 NICs on profits between £9,568 and £50,270 and then 2% on anything they earn above that. The changes when introduced will mean they will now pay 10.25% and 3.25% respectively on their profits.

What about employees?

According to government website GOV.uk:

  • If you earn £20,000 a year, you currently pay £1,251 a year in NICs, which will increase by £130 a year from April 2022.
  • If you earn £30,000 a year, you currently pay £2,451 a year in NICs, which will increase by £255 a year from April 2022.
  • If you earn £50,000 a year, you currently pay £4,851 a year in NICs, which will increase by £505 a year from April 2022.
  • If you earn £80,000 a year, you currently pay £5,479 a year in NICs, which will increase by £880 a year from April 2022.
  • If you earn £100,000 a year, you currently pay £5,878 a year in NICs, which will increase by £1,130 a year from April 2022.

What if you’re a landlord?

Landlords must pay Class 2 NICs if their profits are £6,515 a year or more and what they do counts as running a business (ie being a landlord is their main job, they rent out more than one property and buy new properties to rent out, etc). If profits are under £6,515, a landlord can make voluntary Class 2 NIC payments to get benefits, such as a state pension.

But, as explained on GOV.uk: “You do not pay NICs if you’re not running a [property rental] business  – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.”

Other tax changes announced  

As well as having to pay higher NICs, directors of small limited companies who receive part of their income from dividend payments will pay more tax.

From April 2022, tax on dividend income will increase by 1.25%. So, after the £2,000 allowance, those in the basic rate for Income Tax will pay 8.75% on dividend payments (currently it’s 7.5%), while those in the higher rate Income Tax band will pay 33.75% (currently 32.5%) and those in the additional rate will pay 39.35% (currently 38.1%).

The 1.25% tax increase on share dividends as well as NICs at 1.25% NIC increase will seem particularly unfair to many small-company directors who received little or no government financial assistance to survive during the pandemic. And in some cases, there may no longer be a tax advantage, which could see some deregister as companies and operate instead as sole-trader businesses.     

Reaction from business organisations

An anti-jobs, anti-small business, anti-start-up manifesto breach” – was how the Federation of Small Businesses (FSB) described the tax increases. 

FSB national chair Mike Cherry said: “These hikes will have business owners and sole traders feeling demoralised at the point when they’re trying to recover from the most difficult 18 months of their professional lives. For those thinking about starting up, they send completely the wrong message.

“Business owners who have done all they can to retain and support their staff during the pandemic are now being punished for that loyalty with an £11bn increase in NICs, which essentially serve as a jobs tax.

“This regressive levy hits employers and sole traders without meaningful regard for how their business is performing. And this increase will stifle recruitment, investment and efforts to upskill and improve productivity in the years ahead. At the same time, those running companies, many of whom were left out of pandemic support measures, face a fresh assault on dividend revenue.”

The British Chambers of Commerce (BCC) opposes the changes and believes that tax increases risk hampering the UK’s economic recovery. “Businesses strongly oppose a rise in National insurance contributions, because it will be a drag anchor on jobs growth at an absolutely crucial time,” said Suren Thiru, BCC head of economics. “This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new cost pressures and dampen the entrepreneurial spirit needed to drive the recovery.”

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