Workers hit by national insurance hike
National insurance contributions will increase by 0.5% in April 2011, in a pre-Budget blow to workers.
Chancellor Alistair Darling said the move - "a difficult decision" - would fund frontline forces in the health service, the police force and schools. The change will apply to employer, employee and self–employed rates of national insurance.
However, anyone earning below £20,000 won’t have to pay the increased contributions. This should protect 15 million people on lower incomes, Darling said.
In his speech, the chancellor called for “tough decisions on tax now” but promised that any tax increases would be justified: “I am determined that any tax increases will continue to be guided by our value of fairness and responsibility.”
With this in mind Darling promised taxes on individual bonuses over £25,000 and a reduction to pension tax relief on high earners. In contrast he announced in his speech that no further changes to income tax rates or thresholds will be made in 2010, aside from changes to what is tax deductible. “Because Retail Prices Index inflation was negative in September, this will provide a real-term benefit relative to inflation,” he said.
He also announced the threshold at which individuals start to pay the 40% higher rate of income tax will be frozen in 2012-13, pointing out that no one earning below £43,000 will be affected by this.
Sue Bonney, head of tax at KPMG Europe, is concerned that firms will pay the price for this freeze though.
She says: “The freezing of the higher rate of income tax (which on the face of it are levied on individuals) will in fact most likely be absorbed by corporates either in terms of increased employment costs as it means it will cost more to put a pound in an employee’s pocket.”
Tony Bernstein, from HW Fisher Chartered Accountants, warns increased national insurance contributions will have an adverse affect on businesses and will reduce workers' income.
"This will not only decrease take home pay but increase the cost of employing staff just when the government wants to get more people into work," he explains. "At a time when businesses should be encouraged to take on people, this may do the exact opposite."
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).