I won’t go into the question of whether or not it’s right to fund this in this way here – this post is mainly an outline of what the proposed levy means for workers in general and freelance workers in particular.
The usual caveat to all blog-posts here applies: this post offers a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, and it should not be used in place of professional advice.
Here’s what we know so far, based on the government’s briefing published earlier today:
If you are either an Employee, or a Self Employed Sole Trader, your National Insurance Contributions will go up for at least one year (the April 2022-April 2023 tax year). You will pay 1.25% more than both the current main, and the higher rates. From April 2023 onwards, NICs will revert to the current rate, but a new Social Care Levy will start to be deducted. This will be a new, distinct, and ‘hypothecated‘ (i.e. ringfenced – it can only be spent on social care) tax.
For one year only – higher NICs
For employees, the (Class One) rate is currently 12% for all earnings between £9568 and £50,270 (the basic rate) and 2% (the higher rate) for all earnings above that. So, for one year only, the basic rate will be 13.25% and 3.25% respectively.
For the self-employed pay Class Four rates which are 9% or all earnings between £9568 and £50,270 (the basic rate) and 2% (the higher rate) for all earnings above that. So, for one year only, the basic rate will be 10.25% and 3.25% respectively.
In both cases, workers don’t have to keep paying this after they reach state pension age but once the new levy (see below) comes in, they will have to start paying that.
The Self Employed also pay Class Two NICs at a rate of £3.05 per week each week they are working – this will not change. It is stated explicitly that these Class Two contributions will remain unchanged.
Employers also pay Class 1 NICs on the earning so of individuals that they employ – this is paid at a rate of 13.8% on all earnings over £8,840 and there is no upper limit. As such, this is already a substantial earner for the treasury, and (if my reading of the government’s release on this is correct) it will increase further – by 1.25% to 15.05%.
We should bear in mind that there are a number of employers who don’t pay these NICs for a variety of reasons (low turnover, employment of apprentices under 25, and a few other reliefs) and they will continue to be exempt in 2022-3, but also from paying the new levy from the employer side.
The government is framing this as a levy that will fall largely on the largest 1% of businesses – those with over 250 employees. They are saying that 70% of the funds raised will come from these businesses and that these businesses are also being given significant financial support to take on new staff and apprentices (and they haven’t mentioned the CJRS support, but they could have done).
2023 onwards – the Social Care Fund
My reading of this is that, by 2023, HMRC’s systems will have adapted to allow all of this to be removed from NICs and treated as a new, standalone tax that will appear on payslips and self-assessment forms and be collected separately. The only difference is that people over State Pension Age who will avoid the 1.25% increase will have to pay a 1.25% Social Care Fund payment after 2023.
The taxation of Dividends is a good deal more complicated than the formulas that apply to salaries and self-employed incomes. But, the short description of what will change is that those dividends (7.5% at the Basic rate, 32.5 at the Higher rate and 38.1% at the Additional Rate) will all increase by 1.25%.
It is not clear how this will change in 2023 though – will this increase also be removed and replaced with a standalone levy calculated in this way? We’ll have to see.
The government statement says…
“It is … a highly progressive way to raise revenue. Additional and higher rate taxpayers are expected to contribute over 70 per cent of the revenue from this increase in 2022-23.”
The fact that it is levied on employer NICs is a relief – I wasn’t clear from the early briefings if this was going to be the case.
I would say that this added a new level of smoke and mirrors to an already complex tax situation (the very issue of employer NICs is so un-understood by the general public that it’s already hard to have a sensible conversation about it).
if you earn £30k a year you will be paying an additional levy that will cost you 1.25% on all earnings above £9568.
- So, £30,000 – £9568 = £20,432.
- 1.25 % of £20,432 (i.e. £20,432 x 0.0125 = £255.40 per year.
The thing many of us forget here, though, is that Employer NICs are often also payable.
Larger employers of PAYE employees will also make a contribution based on your earnings (as long as they don’t have an exemption) of 13.8% on all earnings over £8840. This goes up by 1.25% as well, and unlike employee NICs, it doesn’t taper down to 2% once it hits a £50k-ish figure.
- So, £30,000 – £8840 = £21,160
- 1.25 % of £21,160 (i.e. £21,160 x 0.0125 = £264.50 per year.
So, by having a job with a big employer, HMRC get £255.40 + £264.50 = £519.90