Firstly, it must be understood that National Insurance is tax. The rates are not aligned to income tax rates, but it is a tax nevertheless.
The proposed increase in National Insurance by 1.25% will mean that employees, employers, the self employed (including directors of small or micro companies) will pay more tax from April 2022.
The real effect of the increase in rates by 1.25 percentage points is that tax has been increased by more than 10%.
Employees who earn under £9,564 do not pay National Insurance. This is called the primary threshold.
Employees pay National insurance at 12% on earnings between the primary threshold and the Upper Earning Limit (£50,268). Thereafter an additional 2% is paid on earnings above the Upper Earnings Limited.
Very simply, an increase from 12% to 13.5% represents an increase of 10.4% as illustrated in the table above.
Employers generally pay National Insurance on their employees pay on earnings above £8,844 per annum (£737 per month). Exceptions are for employees under 21 or certain apprentices.
The current rate of employers Nation Insurance is 13.8%. An increase of 1.25% results in an increase of 11.5% in real terms.
The self employed also pay National Insurance. This Class 4 National Insurance is levied on profits above £9,568 to £50,270 per annum at a rate of 9%. Thereafter, like employees an additional 2% is levied on profits in excess of £50,270.
An increase in the rate of National Insurance from 9% to 10.25% represents an increase of 13.9%.
There is no National Insurance charged on dividend payments.
Dividends are treated for tax as investment income rather than earnings.
Dividends are taxed at various rates from 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
An increase of 1.25% for basic rate tax payers from 7.5% to 8.75% represents a real increase of 16.7%.
Following the announcement, Gino Amasanti, a director of Sterling Grove Accountants in Buckinghamshire said:
“the changes announced whilst seemingly minor are in fact a significant increase in taxes which will affect a large proportion of taxpayers”.
“The increase in dividend rates is also significant as this isn’t National Insurance and many directors of small companies who may have missed out on the Governments’ Covid grants and other measures may well feel aggrieved that they are now asked to contribute more in taxes”.