The British government is planning to raise individual taxes to fund the National Health Service (NHS) and social care reforms. If the plans materialize, the Tory Party’s 2019 election manifesto promising not to raise taxes would essentially be broken. The tax hike would be a 1.25 percent increase in National Insurance starting April 2022.
National Insurance is a tax that is applied to earnings and profits from self-employed ventures. Unlike income tax, which increases based on a person’s earnings, National Insurance declines with earnings. This means that the hike will have a disproportionately higher impact on lower-income groups.
The 1.25 percent hike would mean that low to average earners would pay 13.25 percent in National Insurance compared to 12 percent previously. For people with higher incomes, the National Insurance would rise to 3.25 percent from 2 percent
For example, an individual who earns 20,000 pounds per year would now have to pay an additional 130 pounds. For those earning 50,000 pounds, an extra 505 pounds would need to be paid. The tax hike would also apply to income from stock dividends, which is mainly to counter claims that the government is solely burdening the working class.
Prime Minister (PM) Boris Johnson justified the hike by saying it is necessary for continuing social care. “You can’t fix the Covid backlogs without giving the NHS the money it needs, and you can’t fix the NHS without fixing social care… You can’t fix social care without removing the fear of losing everything to pay for social care, and you can’t fix health and social care without long-term reform,” Johnson said.
The PM stated that the tax hike is a “difficult but responsible” decision that will help the government raise 36 billion pounds (50 billion dollars) over three years. He added that people with assets less than 20,000 pounds will not have to pay for social care, while those with assets worth between 20,000 and 100,000 pounds could potentially qualify for some sort of financial support.
Impact on the average British citizen
According to a press release by Taxpayers’ Alliance (TPA), the proposed tax hike would result in workers getting charged with a total National Insurance Bill seven times that of retired people.
“The bill for the retired, who face on average £596 per year in employee and employer national insurance contributions, will be dwarfed by the £4,662 contribution of the non-retired. This could see around 1,077,435 older people in work contribute more to the levy than those of the same age who have retired,” the press release stated.
The TPA also estimates that a one percent increase in National Insurance would increase the tax burden (compared to GDP) to around 35.4 percent by the 2024-25 financial year. This would be the highest tax burden on British citizens since the socialist government of Clement Atlee in 1951 when the tax burden was 36.1 percent.
“Boris’s broken promises would leave working people facing the highest tax bills in a generation… Rather than look for a sustainable solution to social care through automation and finding savings, the PM’s plan would opt to hammer jobs and wages, with higher taxes than we’ve seen since the years after the war,” Duncan Simpson, research director at the Taxpayers’ Alliance, said to The Telegraph.
According to Joseph Rowntree Foundation (JRF), the proposal would result in the payment of an extra 100 pounds a year for two million low-income households. Peter Matejic, deputy director of evidence and impact for JRF, said that this extra cost adds “insult to injury” for families facing a “historic” reduction in their benefits receipts. The government is scheduled to cut universal credit by 1,040 pounds a year starting in October.
In an interview with The Guardian, Alex Stafford, who represents Rother Valley in South Yorkshire, stated that taxes should not be raised without proper plans in place detailing how the additional funds will be deployed.
“My concern is if they just add an extra 1% on national insurance or whatever, but no actual fundamental way to make social care provision better, it’s a bit pointless… We can’t just raise it without a new way of providing social care,” Stafford said.
Businesses will also be impacted by the rule. Boris Johnson stated that it was only fair for businesses to also contribute because they benefit from the health and social care system through their employees.
The largest businesses will shoulder the heaviest burdens of the tax hike. The government estimates that roughly 70 percent of the money gained through the tax hike will come from the top one percent of companies. Around 40 percent of businesses will apparently not be affected.
In an interview with Reuters, Suren Thiru, Head of Economics at the British Chambers of Commerce, said that businesses “strongly oppose” the proposed hike in National Insurance as it will be a “drag anchor” on job growth. Thiru warned that the measure would “dampen the entrepreneurial spirit” necessary to drive the economy forward.
According to Stephen Phipson, Chief Executive at Make UK, a manufacturers’ group, job cuts are most likely during an economic resurgence, as businesses will use the capital to reset.
“After witnessing large-scale redundancies at the height of the pandemic and the plug being pulled on the furlough scheme, [the] government should be putting in place measures to protect jobs and incentivize recruitment. An increase to NI would have the opposite effect,” Phipson said.