National Insurance is being increased, to help the NHS recover from the Covid pandemic and improve social care in England, Boris Johnson has announced.
But there has been criticism – including from within the Conservative Party – that the tax increase will be unfair on younger people.
What is National Insurance?
National Insurance is a tax paid on earnings and the profits of self-employed workers.
If you’re employed by somebody, you’ll start paying National Insurance when you’re earning just under £10,000 a year.
National Insurance is also paid by employers.
How is National Insurance changing?
From April 2022, national insurance will rise 1.25 percentage points:
- The current 12% rate on earnings between £9,564 and £50,268 will rise to 13.25%
- The current 2% rate on earnings over £50,268 will rise to 3.25%
- Workers above state-pension age will also contribute to the new levy
- Employers will also need to contribute an additional 1.25% (employer national insurance is currently 13.8%)
- Anyone earning just under £10,000 will still be exempt
- From 2023, the National Insurance increase will appear on people’s payslips as a “Health & Social Care levy”.
How much would the National Insurance increase cost me?
The 1.25 percentage point increase means somebody on £20,000 a year would pay an extra £130, while someone on £50,000 would pay £505 more – as the chart below shows.
But it’s not just employees who pay National Insurance – it is also paid by employers, who currently start paying the tax of 13.8% on wages above about £9,000 a year.
If businesses have to pay more National Insurance, that could be passed on through lower wages or higher prices.
What are the criticisms of raising National Insurance?
Unlike the rate of income tax, which rises once you reach earnings of about £50,000, National Insurance falls at that point.
That means an increase would have a proportionally smaller impact on the highest earners.
And there are other features of National Insurance that might make its use unpopular.
Helen Miller from the Institute for Fiscal Studies said: “Raising National Insurance rates to fund social care would arguably be unfair, including across generations.”
She said potential problems included:
- National Insurance is not paid by pensioners, who would be the biggest beneficiaries
- It is not paid on income from investments or rental properties
- It starts being due at a lower level of earnings than income tax
Also, the government said in its 2019 manifesto, which promised a long-term solution for social care, that it would not raise National Insurance or income tax.
Former Conservative minister Jake Berry MP told the BBC a National Insurance rise would disproportionately affect working people “on lower wages than many others in the country”.
He said they would end up “paying tax to support people to keep hold of their houses in other parts of the country where house prices may be much higher”.
What other options have been suggested for raising the money?
The Resolution Foundation think tank says extending a rise in National Insurance to include working pensioners would make the system fairer, although it would only raise a relatively modest £100m a year.
It also suggested increasing the level at which workers start paying National Insurance closer to the starting rate for income tax, to protect lower earners. That would be funded by increasing taxes on profits from investments.
It has also been suggested that an increase in inheritance tax could be used to help fund social care.
But it would take a big increase to the rate of inheritance tax, or a big cut to the amount that may be inherited tax-free, to raise the £10bn needed. And this could lead to people taking steps to avoid having to pay it.
At the moment, many older people who need residential care have to sell their homes, but the Conservative 2019 manifesto also said “nobody needing care should be forced to sell their home to pay for it”.
What is social care?
The social care system mainly helps older people and people with high care needs with tasks such as washing, dressing, eating and taking medication.
At present, to get your care paid for by your local council you must have a very high level of need and also savings and assets (which may include your home) worth less than £23,250 in England.
Below that level the amount you pay reduces until you have less than £14,250, at which point the council pays for your care if you qualify.
People in residential care homes also have to pay for things like accommodation and food.
The care system is under pressure because of an ageing population and the pandemic. It has been hit by staff shortages and falling government spending.
This has also put pressure on the NHS because people cannot be discharged from hospital if they don’t have anywhere suitable to go.
What happens in the rest of the UK?
The Westminster government only controls the situation in England.
In Wales, no-one who is eligible for care at home is expected to pay more than £100 a week.
The systems in Northern Ireland and Scotland are different for support at home and residential care.
In Northern Ireland, no-one over the age of 75 pays for home care.
Scotland provides free personal care for people who are assessed as needing support at home, whatever their age.
In Scottish care homes, people get free care if they have savings or assets of less than £18,000.
Those with savings and assets of between £18,000 and £28,750 have to fund part of their care. People with more than that have to fund their own care, apart from a £193.50 a week contribution towards personal care and £87.10 a week towards nursing care.