Millions of workers will start paying higher National Insurance contributions from today as part of a plan to raise billions for the NHS and social care.
The increase of 1.25 percentage points, first announced last fallis being introduced despite pressures to postpone it given greater cost of living pressures – with energy, fuel and food bills all rising.
This means annual earnings over £9,880 will be subject to 13.25% NI contributions. Above an upper threshold of £50,270 the rate will be 3.25%.
Employers also pay National Insurance – and this rate also increases by 1.25 percentage points.
Critics call it a jobs tax and warn it could force companies to raise prices or cut wages.
An initial assessment by HM Revenue and Customs after the policy was announced calculated that 29 million workers would be worse off as a result of the measure.
However, other changes announced in the last month spring statement will reduce the tax bill.
These will see the threshold to start paying NI rise from £9,880 to £12,570 from July.
The Institute for Fiscal Studies (IFS) calculates that, taking the rate hike and threshold increase together, it will mean a lower National Insurance bill for those earning less than £35,000 for the year tax 2022/23 compared to the previous year.
Those earning over £35,000 will pay more, the IFS calculates.
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The government says its policy will mean £39billion will be invested in health and social care over the next three years.
He underlines the need to tackle the NHS waiting list, which exceeds six million and is set to grow further due to a backlog of patients who were reluctant to seek treatment during the pandemic.
The new tax levy is also designed to help make social care more affordable.
Lifetime care costs will be capped at £86,000 from October next year.
There will also be a change in the assessment of individual assets that people need to have in order to be eligible for childcare support.
Currently, only those with assets below £23,250 receive support. This will go up to £100,000, also from October next year.
Prime Minister Boris Johnson said the levy was the “necessary, fair and responsible next step, providing our health and care system with the long-term funding it needs as we recover from the pandemic”.
Chancellor Rishi Sunak said: “This government will not hesitate to make the tough decisions we need to make to fix our welfare system and reduce NHS waiting times.”
The 2019 Conservative election manifesto pledged “not to raise income tax, national insurance or VAT rates”, but it has been argued that the promise was made before the pandemic.
The Office for Budget Responsibility (OBR) now projects that the overall tax burden as a share of GDP will reach its highest level since the late 1940s by 2026/27.
Speaking to Sky News on Wednesday, Health Secretary Sajid Javid also defended the move.
“All funds raised through this will go towards the additional £39billion we are going to spend over the next three years on health and social care.
“It’s going to pay off in the NHS for activity levels that are around 130 per cent of pre-pandemic levels, there will be nine million more scans, tests and procedures, meaning people will be seen Much sooner.
“Why is all of this necessary, whether for health or social services? It’s because of the impact of the pandemic. We know this is unprecedented. This has been the biggest challenge for our life.
“The impact of this is going to continue for many years.”