Boris mounts raid on NICs, dividends and pensions
Boris Johnson: reasonable and fair
A new health and social care tax will be introduced on all workers from next year along with a hike in tax on income from dividends and a lower rise in the state pension.
Prime Minister Boris Johnson said there was a need to raise revenue to help pay for the care that the public demands.
The health and social care tax will begin as a 1.25% rise in National Insurance for employees and employers from April 2022. It will then become a separate tax on earned income from 2023.
Downing Street said that a typical basic rate taxpayer earning £24,100 would pay £180 a year, while a higher rate taxpayer on £67,100 would pay £715 as a result of the new tax.
Dividends which are levied on business owners and investors, will also increase by 1.25% from April 2022, from 7.5% to 8.75%.
- It will raise £600m from investors and self-employed
- It is likely to hit company directors more than retail investors
The prime minister has insisted the new health and social care levy was “the reasonable and the fair approach”, despite the fact it breaks a key commitment in the 2019 election manifesto.
While the new revenue is principally target health care in England the three devolved nations expect to benefit from an extra £2.2 billion a year, he said, adding that “this is about 15% more than they would contribute through the levy”.
In a letter to the First Ministers of Scotland, Wales and Northern Ireland, he said that by 2024-25 Scotland will benefit from an additional £1.1 billion, Wales from £700 million and Northern Ireland from £400 million.
It will be for the devolved nations to decide how to spend the money but Scotland’s First Minister Nicola Sturgeon today pledged her government would bring forward legislation within the coming year to set up a National Care Service.
Paul Johnson: not the right tax (pic: Terry Murden)
But Paul Johnson of the Institute for Fiscal Studies think-tank said National Insurance was “not the right” tax to put up to pay for social care reforms.
“Today’s announcements constituted a Budget in all but name,” he said. “£14 billion of tax raised through a supposedly new tax, equivalent increases in spending on health and social care, and an announcement of spending totals for the next three years certainly constitute a major fiscal event.
“It is disappointing that the government did not find a better package of tax measures to fund these spending increases. A simple increase in income tax would have been preferable.
“But overall much needed reforms to social care are being introduced and unavoidable pressures on the NHS are being funded through a broad based and broadly progressive tax increase. That is better than doing nothing.”
There was discontent on the Tory back benches with some MPs fearing a backlash from voters, though some said voters accepted the need to find more resources for health care.
It emerged that just £5.3bn of the £36bn of revenue raised in the next three years will go to social care in England, with the rest earmarked for a huge ‘catch up programme’ to stabilise the NHS after the pandemic.
Labour MP Ian Murray, Shadow Scottish Secretary, said: “The Tories have shown their true colours and are willing to place the burden on working people and businesses, rather than fix the social care crisis.”
On the stock market, the FTSE 100 spent the day under water and closed at the lowest point of the session, down 34.43 points at 7,152.75.
Danni Hewson, AJ Bell financial analyst, said: “There’s not much like the threat of tax hikes on dividends to send an icy chill up investors spines but in actuality the 1.25% hike will have a pretty limited impact netting the Treasury a paltry sum compared to the billions needed to shore up social care and the jungle drums are already beating that allowances on many tax wrappers like pensions and ISAs could be whittled away in the next budget.”
Suren Thiru, head of economics at the British Chambers of Commerce, said: “Businesses strongly oppose a rise in national insurance contributions as it will be a drag anchor on jobs growth at an absolutely crucial time. Firms have been hammered by 18 months of Covid related restrictions and have built up huge debt burdens.”
On the dividend tax rise, Andy Chamberlain, director of policy at IPSE (the Association of Independent Professionals and the Self-Employed), said: “After the financial damage of the pandemic, exclusion from support and the changes to IR35 taxation, this new tax hike on dividends will make it almost impossible for freelancers to continue to work through a limited company.”
Lord Bilimoria, CBI President, said: “This is out of the blue so investors, savers and businesses will need time to consider the full implications.
“Such investment plays a critical role in supporting businesses and enabling growth across the whole economy.”
Alongside the NIC rise, Work and Pensions Secretary Therese Coffey confirmed that the pensions triple lock pledge – which generally means payments rise by the highest of average earnings, inflation or 2.5% – is being dropped for one year.
Pensioners should have been in line for an 8% rise in their weekly payouts next year. Instead, the Government has scrapped the earnings element of the triple lock to save an estimated £4.5bn a year.
As a result pensions are likely to rise by around 2.5% depending on the trajectory of inflation.
- Those in receipt of the full flat-rate state pension could see their payment increase from £179.60 per week to £184.10 per week
- Those in receipt of the basic state pension could see their payment increase from £137.60 to £141.05
In a statement to the Commons, Ms Coffey stressed that the suspension was for a single year and the arrangements will be reinstated.
James Andrews, senior personal finance editor at money.co.uk, said: “On one level the decision to suspend a manifesto pledge makes economic sense, with a bumper payout coming just as the Government looks for any way it can to find money to cover the cost of COVID-19 payments and earnings still down on two years ago.
“But people are bound to ask why they made that decision today when suspending the triple lock was far from the only option on the table.
“For example, it would also have been possible to move the earning element to a three-year average rather than an annual figure.”
How do the changes affect Scotland?
In Scotland the Chartered Institute of Taxation (CIOT) said as well as the NIC increase, the changes to dividend tax will also apply to Scotland as control over tax on dividends is reserved to the UK Parliament.
Alexander Garden, chairman of the CIOT’s Scottish Technical Committee, said: “For higher earners in Scotland who have employment income between the Scottish and UK higher rate thresholds for income tax (currently £43,662 and £50,270), these changes would mean that next year, this portion of their income would be taxed at a marginal rate of 54.25%, compared to 33.25% for people elsewhere in the UK.
“This is because the upper earnings limit for National Insurance, the point at which the rate of NI paid will fall from 13.25% to 3.25%, is linked to the UK, not Scottish, higher threshold.
“This anomaly has existed since the Scottish and UK higher rate tax thresholds began to diverge in 2017.
“The changes announced today also mean that anyone with employment income of more than £9,568 per year will be asked to pay more. This is below the level of earnings at which income tax starts to be paid.
“Most employees will pay an extra £37.53 per year more than they would have if the government had decided to fund this package through income tax.
“However, if a person is receiving Universal Credit, then at least initially their benefit should be topped up to compensate for some of the loss of income resulting from the NI increase next year. This is because entitlement to Universal Credit is worked out after income tax and NI deductions are taken into account.
“It will be important to clarify whether the new standalone surcharge will be treated in the same way for Universal Credit purposes so claimants know whether they will continue to get this protection once NI rates revert back to normal.”