NI contributions to increase

National insurance contributions will rise by 0.5% from 2011, the chancellor Alistair Darling has announced.

The move will affect both employers and employees who earn more than £20,000 a year as well as the self-employed. In his pre-Budget report, Darling said: "I propose, therefore, from April 2011 to increase by half a percent all rates of national insurance contributions, for both employees and employers.

"But to ensure this increase does not fall on those on modest incomes, I have also decided, at the same time, to raise the starting point for national insurance to align it with that of income tax. No one under £20,000 will pay any more national insurance contributions as a result."

Darling also announced that those with incomes over £150,000 will have to pay a new rate of income tax of 45% from April 2011. The chancellor also announced that the government will permanently keep the temporary tax cut introduced earlier this year after scrapping the 10p rate.

In May, Darling announced a one-year increase in the income tax personal allowance – a benefit of £120 a year for basic rate taxpayers – following the debacle that ensued when he abolished the 10p rate.

He has now decided to keep the tax cut and has also upped it to £145 a year from April next year.

This move is estimated to benefit 22 million basic rate taxpayers. “My announcement in May helped 4.2 million households affected by the abolition of the 10p rate," said Darling. “This announcement will help another half a million households – not just this year but for good."

John Whiting, tax partner at PriceWaterhouseCoopers (PwC), says the increase in personal allowances would give “welcome relief all round in the short-term”.

But others were less impressed about the changes to national insurance contributions. Matthew Hunnybun, partner at PwC, says: "We don't really know how many people this will affect yet but it will definitely cost both employers and employees more."

Stephen Robertson, director general of the British Retail Consortium, says: "In 2011, the chancellor believes we will just be emerging from recession. This seems an extraordinary time to be increasing this tax on jobs.”

Stephen Herring, tax partner at BDO Stoy Hayward, says: “National insurance contributions paid by employers represent a payroll tax and, at the margin, will influence the level of employment.

“The increase of 0.5% to be suffered by the self-employed represents a 50% increase in the existing 1% rate in excess of the upper earnings limit. This will be seen by both the self-employed and employees on earnings of over £40,000 as a significant additional tax burden from 2011/12.”

Francesca Lagerberg, head of national tax at Grant Thornton, says while these tax-cut will come as a great relief to many low income earners the majority of people will have to 'pay' for these cuts soon aftter the next general election.

"With an attempt at a Churchillian makeover, Darling has presented this pre-Budget report s as helping low income earners and families in times of deep economic uncertainty," she explains. "The raised personal allowance announced in May cost £2.7 billion but did not help all those affected by the abolition of the 10p tax

"With the new measures, the chancellor has positioned himself as supporting hard-working taxpayers help face the recession which is expected to deepen next year.

"While these significant tax giveaways are hoped to have a quick impact on the economy, voters are likely to pay back these tax cuts soon after the next general election, not just hitting out at high worth individuals but on
low income earners too. The increase in national insurance contributions, which will take effect from April 2011 with 0.5% increase, could sting low income earners when they are getting back on their feet. This may pose to be a pre-Budget report of short-term gain and long-term pain."