Many state pensioners will be among those affected by the government’s planned National insurance rise to increase funding for health and social care.
From April 2022, employees, employers and self-employed people will have to pay an extra 1.25p in every pound paid in National Insurance.
But from April 2023, this money will be collected in the form of the new Health and Social Care Levy, which will also apply to state pensioners who are still in work.
The levy is expected to raise £36 billion over the next three years, and is a key part of the government’s efforts to ease pressure on the NHS and make sure that older people can get adequate care provision later in life.
What will it look like for you?
The levy marks a significant change to the system for pension-age people, as those who have reached state pension age and continue working currently don’t have to pay National Insurance Contributions (NICs).
People looking to reduce the amount they pay in NICs may have options open to them, however, including salary sacrifice (also known as salary exchange).
If your employer uses salary sacrifice, you will pay less National Insurance, and the more you pay into your pension, the less tax and National Insurance you will pay.
What increase will I see in my tax bill?
If you’re employed and not receiving a state pension, you currently pay Class 1 contributions, which equate to 2% on pay over £797 per month, or £9,568 per annum. Any earnings over £50,270 are charged at an additional 2%.
It’s believed that once the tax rate increase comes in, the rate will go up to 13.25% and 3.25% respectively.
So if you’re currently earning:
- £20,000 with NI payments of £1,252,84 per year, these will go up to £1,382,24
- £40,000 with NI payments of £3,651.84, these will go up to £4,032.24
- £100,000 with NI payments of £5,878.84, these will go up to £7,009.24.
This means that if you’re earning £100,000, you’ll see an increase of £1,130.40 or 19% in the amount of NI due. For those on a lower income of £20,000, this would be an extra £130.40 per year or 10%.
What if I’m self-employed?
Currently, if you’re self-employed and below state pension age, you pay Class 2 and Class 4 contributions on your profits. At the present time, if you earn more than £6,515, that’s £3.05 per week as Class 2, plus a 9% Class 4 contribution on earnings between £9,568-£50,270. Any earnings over £50,270 are charged at 2%.
The final details have yet to be announced but if Class 2 contributions stay at £3.05 per week, it’s thought that Class 4 NI contributions for the self-employed would rise by 10.25% and 3.25% respectively.
So if you’re self-employed and currently earning:
- £20,000 with NI payments of £1,097.48 per year, these will go up to £1,227,88
- £40,000 with NI payments of £2,897.48, these will go up to £3,227.88
- £100,000, with NI payments of £4,816.38, these will go up to £5,946.78.
Tax is paid differently by self-employed workers but the increases to each income band are the same as employed workers. So someone earning £20,000 would still pay £130.40 more for NICs and someone earning £100,000 would pay an additional £1,130.40.
If you have any questions about what the Health and Social Care Levy will mean for you and your retirement income, don’t hesitate to get in touch.