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National Insurance: What’s changed?

Your National Insurance Letter

© Artur Szczybylo /

04th October 2021

Dexter Lawrence Written by Dexter Lawrence

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A major criticism is that the government is going back on its 2019 election manifesto promise not to raise NI contributions. However, responding to opponents, Prime Minister Boris Johnson says the National Insurance changes are necessary due the burden the Covid-19 crisis has placed on the NHS.

The scheme is expected to raise an extra £12 billion per year. Initially, the money will go into NHS coffers, but over the next three years, a portion will be moved into social care funding.

How does social care work at present?

The social care system helps mainly older people and those with high care needs, who require assistance with tasks such as dressing, washing, eating and taking medication.

In order to get social care paid for by the local council in England, the recipient must have a very high level of need and must have savings of less than £23,250.

Those with assets of between £14,250 and £23,250 will be required to pay something towards their care. Once their savings drop below £14,250, the council will pay for anyone who qualifies.

However, the care system is under increasing pressure because of the UK's ageing population and the Covid-19 pandemic. Staff shortages and a lack of government spending have hit hard. This is putting more pressure on the NHS because people needing care who have nowhere to go can't be discharged from hospital.

In Wales, any individual who is eligible for care at home is required to pay no more than £100 per week. In Northern Ireland, nobody who is older than 75 has to pay for home care.

In Scotland, free personal care is provided for anyone who needs support at home, however old they are. People living in care homes in Scotland receive free care if they have savings and assets of less than £18,000. People with savings and assets of between £18,000 and £28,750 must pay in part.

When will the increase start?

National Insurance contributions will not change until April 2022. With an increase of £1.25 in the pound, the amount people pay will vary depending on earnings.

For example, an employee who earns £20,000 a year will pay an extra £130 National Insurance annually, while someone who earns £50,000 will pay £505 more. The top earners on £100,000 per year will pay an extra £1,130 on top of the £5,878 that they pay already.

People who earn less than £9,564 a year, equating to £797 a month, are not required to pay National Insurance, so won't have to pay the new charge.

National Insurance is a tax paid across the UK, so Scotland, Northern Ireland and Wales will also receive extra funding to spend on their services.

How will the new system work?

Employees will pay more National Insurance on their wages, while employers will also pay extra NI for their staff and self-employed people will pay more on their profits.

In England, anyone with assets or savings of less than £20,000 will have their care needs covered fully by the state. Their assets include their home, savings and investments. The state will subsidise the care costs of anyone who has between £20,000 and £100,000 in savings and assets.

Further National Insurance changes will take place from April 2023, when National Insurance will return to its current rate. However, the extra money will still be collected by the government as a new Health and Social Care Levy. Unlike NI, the levy will also be paid by state pensioners who are working.

How will this affect businesses?

For medium-sized businesses, the increase might just about be manageable, but for small business who are already over-stretched, the increase could have a more negative impact. In particular, self-employed people could be struggling under the new rules.

As every small business owner will know, National Insurance is a tax deducted from working people's wages through the PAYE (pay as you earn) tax system. It goes straight to HMRC (Her Majesty's Revenues and Customs).

Currently, employers and employees pay Class 1 National Insurance, based on how much the employees earn. The NI rate for employers is 13.8%, while it is 12% for employees, up to £50,000 a year. If they earn anything above this amount, it is taxed at 2%.

This has been another criticism of the new NI rate. Although, on paper, higher earners are paying more National Insurance, they are actually paying less in terms of the percentage of their salary that goes to HMRC.

When the higher rate kicks in next year, it will hit low earners harder, as they will be paying a disproportionately higher percentage of their salary to the tax office. Although the top earners will also be hit by the increase, their rate of NI is lower already, so they won't feel as big an impact as the low earners.

Financial implications

Analysts fear National Insurance changes could be devastating for small businesses, who are trying to recover from the pandemic. The increase in employer contributions will leave less money to spend on growing the business.

In terms of calculating the company payroll, it could cause headaches for employers who are already facing a challenging economic climate. They will need to calculate exactly how much the new rate is going to cost them and work out if they can make savings elsewhere.

The increase could also negatively impact the economy, analysts fear, as it will cost a typical small business, with 50 employees, an additional £10,000 to £20,000 per year.

Self-employed people currently pay either Class 2 or Class 4 National Insurance contributions. This is less than small and medium size businesses and it is taxed on income after business expenses. Under the new rules, a sole trader will also lose an additional 1.25 pence for every £1 earned.

This means as well as paying your own salary, you will also be taxed on your earnings, which is another direct reduction of income.

For many SME owners, this is one hassle they could do without. This is why a lot of businesses use the services of a professional accountant to help manage their payroll, tax returns and other financial and legal aspects of running the business.

If all this seems a little daunting, find out how DL Accounts can help your business during these challenging times. Contact us today for a no-obligation chat.