April 6 marks the start of the new 2022-23 tax year and the day most workers start to pay a new tax: the health and social care levy. For one year only, the levy will take the form of a 1.25 percentage point increase in the national insurance that employees, their employers and the self-employed pay. Thereafter, it will be shown on payslips as a separate tax.
In the spring statement, Chancellor Rishi Sunak was adamant that the rise in national insurance rates will go ahead. But, responding to concerns over the cost of living crisis, he announced that the income threshold at which you start to pay national insurance will rise to £12,570 from July 6, 2022.
For most earners, this will more than offset the rise in rates. The impact on you will vary according to how much you earn and how you are affected by other tax and benefit changes.
National insurance is a tax paid by workers (employees and the self-employed) aged 16 up to state pension age (currently 66) on earnings and profits above a specified threshold, which was £9,568 in 2021-22. From April, the threshold is rising as previously planned to £9,880. However, following Sunak’s announcement, the threshold will rise again in July to £12,570, aligning it with the income tax personal allowance. From 2023-24, the threshold will remain at £12,570.
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The national insurance rise means that for employees, instead of paying 12% on earnings up to £50,270 and 2% on anything above that, you’ll pay 13.25% and 3.25% respectively. If you’re self-employed, your rates will go up from 9% and 2% to 10.25% and 3.25%.
After April 2023, the levy will be split off from national insurance and shown on your payslips as a separate tax. At that point, the health and social care levy will be extended to include workers over state pension age. But pensioners who do not work will not pay the levy.
From April 2022, income tax on dividends will also increase by 1.25 percentage points. This is mainly a tax avoidance measure to stop self-employed people who operate through companies avoiding the levy by switching to paying themselves dividends instead of earnings.
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How you may be affected
The rise in the threshold will take 2.2 million people out of paying national insurance altogether.
Looking at the combined effect of the rise in threshold and rise in rates, employees earning up to £34,370 will see a cut in their national insurance in 2022-23 compared with 2021-22. People earning more than that will see a rise. Someone on average full-time earnings (£31,772 a year) will save around £33 in 2022-23, and slightly more in subsequent years considering the combined effect of national insurance and the new levy.
However, the national insurance measures are just part of a range of changes affecting incomes.
To help get the government finances back on track after the pandemic, the income tax and personal allowance thresholds have been frozen at their 2021-22 levels for the next four years, where normally they would rise along with inflation (Scotland sets its own thresholds but has also frozen them for this year). This means that, as earnings rise, more people will start paying tax, proportionately everyone pays more tax than they would have done and the number of higher-rate taxpayers swells.
The third and fourth columns of the table show the combined effect of the national insurance and income tax measures on the proportion of income taken in tax. The combined average tax rate falls for those with incomes below £34,370 but rises for higher earnings.
On the plus side, around 1.4 million lower earners will see a 6.6% rise in the national living wage. And around 2 million workers are getting an increase to universal credit (average £1,000 a year).
However, the inflation outlook is worsening and many local authorities have also announced a rise in council tax. So despite the Chancellor’s change to the national insurance threshold, the upcoming year is still set to be financially difficult for everyone.
Why the increase?
The government has said that the levy will raise around £12 billion a year. For each of the first three years, £1.8 billion will help pay for social care, but the bulk of the money will go to the NHS to help clear the backlog of waiting lists caused by the pandemic.
Funding social care is a problem that has haunted governments for decades. There have been several reviews, the most recent of which was the Dilnot commission in 2011. It recommended a lifetime cap on the amount anyone would have to pay for care.
This would protect people from catastrophic costs if they ended up needing care for many years, and encourage the insurance industry to develop private insurance to cover care costs up to the cap. The Care Act 2014 largely translated the commission’s proposals into law, but its measures were not implemented at that time.
The government is now introducing a watered-down version of the Dilnot reforms, funded by the new levy. Political parties have toyed with the idea of taxing wealth to pay for social care (for example, Labour in 2010 and the Conservatives in 2017), but the new levy on earnings is the current government’s preferred option.
The lifetime cap to protect individuals from catastrophic care costs will benefit older, wealthier people most. Despite this, older people will pay only a fraction of the tax being raised by the new levy. Ignoring the change to the national insurance threshold, the Institute for Fiscal Studies has estimated pensioner households will pay just 2% of the amount raised by the new levy. One third will come from those aged 50-65, and two-thirds from those under age 50.
Younger people have an interest in the nation having a system that can help them later as they themselves age. But it’s hard to be confident that today’s system will still be in place decades ahead, especially because of the continuing pressures of an ageing population.