The government recently announced a raft of changes to UK taxation, including a 1.25% rise in National Insurance, a temporary suspension of the State Pension triple lock, and a Dividend Tax increase.
While the 2019 Conservative Party Manifesto promised not to raise taxes, later in the same year, in his first speech as leader, prime minister Boris Johnson, addressed the UK’s social care crisis.
Then came the coronavirus pandemic.
The rise to National Insurance announced earlier this month will come into force from April 2022 and will show as a separate deduction – labelled a “Health and Social Care Levy” – from 2023.
It will see National Insurance contributions (NICs) rise for all UK workers, including those above State Pension Age, who will pay National Insurance for the first time.
Here’s your guide to what the new levy is and what it could mean for your finances.
The social care crisis
Age UK reports that funding for adult social care has been cut by £86 million since 2010, despite an ageing population and rapidly increasing demand.
This has led to 1.5 million people aged 65 and over not receiving the care and support they need with essential living activities.
The coronavirus pandemic has forced record borrowing and only a part of the new levy will go directly towards social care, at least over the next three years.
The government has confirmed that the tax increase will generate an additional £12 billion a year for health and social care. They have earmarked £5.4 billion of this for social care, with £8.9 billion going towards a “health-based Covid response”.
It is expected that this balance will shift as the NHS backlog caused by the pandemic begins to clear.
How much extra will you pay?
According to figures published in the Guardian, the extra 1.25 percentage points will mean an increase in NICs of £505 for an individual earning £50,000. The effective tax rise would take contributions from £4,852 to £5,357 each tax year.
If you earn more than £100,000 a year, your annual contributions could rise by over £1,100.
The rise isn’t just payable by employees; employers will be subject to the increase too. And, for the first time, working pensioners above State Pension Age will make NICs from 2023.
Currently, NICs cease when working taxpayers reach 66, the age at which the State Pension kicks in. From 2023, working pensioners will contribute at a starting rate of 1.25%, effectively a rise from 0%.
A working pensioner earning £60,000 a year will go from paying nothing to paying £630 a year in National Insurance, on top of the Income Tax they already pay.
Long-term planning can mitigate the impact of the increase
A long-term financial plan, based on a holistic view of your whole financial position, should be robust enough to mitigate against the impact of future changes to regulation or taxation.
Long-term investments will match your risk profile at any given time, allowing for higher risk during the accumulation phase while consolidating gains in later life through a move to lower-risk funds.
An increase in the tax you pay as an employee or employer might mean you need to revisit your income and outgoings, but it shouldn’t alter your long-term plans. If your dream retirement hasn’t changed, your plan to get there won’t need a drastic overhaul either.
If you are already at retirement age and still working, the increase might require more thought. Any shortfall may need to come from savings, but Boolers can help you work out the best and most tax-efficient option for you.
The rise for pensioners is a particular blow as it coincides with the news that the State Pension triple lock is also being suspended.
The coronavirus pandemic and the large-scale furloughing of workers led to a drop in wages last year, followed by a swift increase when lockdown finished. As wage growth is one of the three factors by which the State Pension increase is measured, the lock has become a “double” lock – albeit temporarily.
It is likely the State Pension will now increase by the rate of inflation.
Get in touch
The National Insurance contribution rise will mean a costly tax hike for many, but as with all tax and regulatory changes, it is important not to panic.
Boolers can help you revisit your plans, helping you budget with the income you have once the rise kicks in. It is important to remember, though, that your plan is robust. If your long-term goals haven’t changed, your finances needn’t either.
If you have any concerns about the announced tax changes or would like to discuss any aspect of your long-term financial plans, please contact us today.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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