National insurance (NI) is a compulsory financial charge imposed on individuals and businesses by the government to fund public expenditures. It was introduced by the National Insurance Act 1911 to provide insurance to workers who had become unemployed or for those who required medical treatment. Advancing to the present day, national insurance contributions are used to fund the National Health Service (NHS), government benefits and state pensions.
Recently, the government has announced that from April 2022, individuals and businesses will be burdened with an increased tax liability as NI is set to incur a 1.25 per cent increase. The purpose is to increase NHS funding, remedy the backlog caused by the COVID-19 global pandemic, and with a small percentage going towards social care funding. Projected to raise around £12 billion, Boris Johnson applauds the decision as “the right, the reasonable, and the fair approach” and maintains that it shows our appreciation to the health care workers’ resilience and dedication during the pandemic.
Whilst the reason for the increased levy is undoubtedly fathomable, this does not seem to be reciprocated when one considers whether the focus wholly on NI is indeed right, reasonable, and fair. Particularly, it is observed by many critics that other taxation methods should have been explored. Instead, the bill was hastily passed through the House of Commons in a single day. Not only is the 1.25 percentage increase unsupported by sufficient details of the proposed social care reforms, but it also shows the potential danger that may unveil given the quick turnaround and minimal consideration given to other viable methods. Therefore, it is unsurprising that there has been a raft of recommendations with proposals for alternative methods since Johnson’s announcement in early September, some of which will be briefly explored below.
Income from investments and pensions is a significant chunk of Britain’s wealth, and this wealth has more than doubled since the 1960s.Tax receipts from this increased wealth, however, have remained the same. Therefore, it is debatable whether the focus should be redirected on granting higher taxes on this new wealth, particularly assets such as property and private pensions. Likewise, one other possible method would be to disapply exemptions that apply to investment income and pensions. Although the amount of tax payable on dividends is also set to increase by 1.25 per cent from April 2022, some allowances and exemptions operate, which help reduce tax liability. Namely, the dividend allowance of £2,000 will remain, meaning tax will only be paid on any income above this threshold and dividends from shares in an ISA are tax-free. So, values up to £20,000 can be sheltered from any tax liability in any one tax year.
Similarly, a tightening of the rules for other taxes such as capital gains tax (CGT), where well-utilised exemptions save investors around billions each year, or inheritance tax (IHT) could also be considered. Entrepreneurs’ relief is a CGT exemption that reduces the tax rate paid on the disposal of business assets to the basic rate of 10% on the first £1 million of gains made. Reducing the £1 million threshold and applying tax liability to a wider scope of gains would significantly increase the pool of funds directed towards NHS and social care funding. Now addressing the tightening of rules for IHT; from April 2020, the Residence Nil Rate Band allowance was increased to a limit of £175,000 per person. This means that married couples and registered civil partners have the potential to freely pass on a combined estate value of up to £1 million to their children without any tax liability. If a reduction is applied to this £175,000 threshold, significant results would follow and will likely go beyond the £12 million projection from increased NI. The tightening of these tax rules would, in effect, cast the net wider, and a larger pool of earnings will be burdened with tax liability. This also applies to a final alternative that could be utilised: to stretch the upper limit of the 12% band that currently applies to NI. Presently, income between £9,568 and £50,284 incurs national insurance at 12%, with any earnings over that taxed at 2%. By going above and beyond the £50,284 ceiling would again increase the total amount of tax charged.
We can only anticipate the true implications of the NI increase when it is put into effect next year, but it does seem that a disproportionate result is inevitable. The younger generation and those with poorer households are likely to be affected the most, especially in the wake of other cuts such as the weekly £20 universal credit top-up ending on 6 October 2021. On the other hand, individuals with income from investments and earnings from pensions will be minimally affected as lower tax rates will continue to apply.