The burden of the rise in National Insurance will be felt by people on their next payday as they try to juggle surging living costs on a shrunken wage packet, experts have warned. Here is a look at why the increase is happening and why "awful April" is seen as just the start of a string of tough months ahead:
Why is National Insurance going up?
The UK government says the 1.25 percentage point rise in National Insurance (NI) will be spent on the NHS, health and social care. Employees, employers and self-employed people will all pay an extra 1.25p in the pound on anything earned above the tax-free threshold.
NI is progressive, meaning those who earn more pay more. From April 2023, contributions will be dropped to the 2021/22 level as it is replaced by a new health and social care levy.
The tax rise could raise £39 billion over the next three years, helping to reduce NHS backlogs that have been exacerbated by the coronavirus pandemic. The extra cash raised could reduce waiting times and deliver millions more scans, tests and operations.
Who pays National Insurance and how is it taken?
If you are employed in England, Scotland, Wales or Northern Ireland, NI will come out of your wages before you are paid and the contributions will show in your payslip. Employers pay extra contributions for their staff and self-employed people pay NI on their profits.
How else are finances being squeezed?
This month has been dubbed "awful April" by some as households are dealing with multiple pressures from soaring living costs. The NI rise comes on top of a 54% increase to Ofgem's energy price cap and increases to council tax and water bills, mortgages, rents, food and transport costs.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: "Awful April is just the beginning of an incredibly tough few months. The real pain of the National Insurance hike will be felt on payday, at the end of the month.
"At that point, we'll be reeling from the impact of higher energy bills, council tax, water bills, fuel costs – and we'll have to manage it all on a smaller pay packet. It's a terrible time to hike taxes."
Why might the pinch be greater over the next few months?
Employees currently pay NI on annual earnings above £9,880. From July this threshold will increase to £12,570. Ms Coles said the rise in the NI threshold will help combat the cost of the increase for lower and average earners.
"[But] it doesn't actually affect pay packets until the end of July", she said. "In the intervening months, the threshold will be just £9,880, and the 1.25 percentage point rise will leave someone earning £20,000 paying £130 more a year, someone on £30,000 will pay £255 more and someone earning £50,000 will pay £505 more a year.
"And while 1.25 percentage points doesn't sound like much of an uplift, in reality it will mean someone on an average wage will pay 10% more."
What can people do to combat the impacts of the rise?
Lowering your take-home pay via a salary sacrifice scheme would reduce the amount you earn over the NI threshold and so lessen the tax burden, experts say. Salary sacrifice schemes allow employers to reduce an employee's salary and pay the equivalent amount into a non-cash benefit, such as pension contributions or a cycle-to-work scheme.
Adrian Lowery, personal finance expert at investing platform Bestinvest, said: "An employer could agree to contribute a greater proportion of your salary into your workplace pension, in lieu of pay. While pension contributions always benefit from income tax relief, if this system is used then National Insurance relief is also obtained."
He said there are downsides, however, to reducing your salary, such as decreased mortgage affordability.
Myron Jobson, senior personal finance analyst at Interactive Investor, warned: "A lower salary can affect entitlements such as maternity/paternity pay, mortgage applications based on one's income, and some state allowances. As such, people should always consider how such benefits could impact their finances more broadly."
