It was announced on September 8th that a rise in National Insurance contributions will be implemented in April 2022. The increase is due to the need for further investment in health and social care, in the wake of the pandemic to clear NHS treatment backlogs.
Prime Minister Boris Johnson claimed that around 9 million NHS treatments could be funded by the government’s proposed investment but did not reveal any specific targets.
With many small businesses in the UK still scrambling to get back on their feet following multiple lockdowns, this news is far from ideal. Read on to find out what effect the changes to National Insurance might have and what could be done instead to achieve the same outcome.
How will the tax work?
The rise in National Insurance contributions will result in employees, employers and the self-employed paying 1.25% more in the pound. By April 2023, National Insurance will return to its current rate, with the extra tax being collected as a new levy for Health and Social Care. Unlike National Insurance, state pensioners who still work will also have to chip into this levy.
How will it affect UK employers?
A tax increase is another blow to small businesses who are still struggling with the after-effects of Covid, including lost revenue, staff shortages and now the “Pingdemic”, which has upset economic growth across the country.
After the increase, employers may find it is more expensive to recruit new staff due to the percentage of National Insurance that employers pay for each employee. An increase in National Insurance contributions will result in employers paying a higher percentage than usual, which could quickly add up if the business takes on several new employees. Recruitment challenges appear likely and small companies may have to compensate for increased rates by making savings elsewhere.
How will it affect UK sole traders?
Sole traders are likely to be hit hardest by an increase in National Insurance contributions, as they pay taxes through self-assessment, meaning the rate paid is determined by the individual’s revenue (after subtracting business expenses). Unfortunately, increased rates will significantly impact the salary which sole traders can pay themselves.
If you’re unsure what this means for your business, consult the services of a tax professional so you know exactly how to comply with the new regulations.
Are there better alternatives for revenue for the NHS?
It’s clear increasing National Insurance will significantly affect employees across the UK, as well as small businesses and sole traders, but are there any other options?
Reports by the BBC suggest financial experts such as Paul Johnson, director of the Institute for Fiscal Science (IFS) disagree with the government’s decision and are calling for alternative methods to be considered. One suggestion given was to raise income tax, which would soften the blow for the working population and distribute it more evenly across all generations.