National Insurance Hike Puts U.K. Taxes on a Record High-Setting Path for Businesses and Workers
The independent research group stated that additional tax hikes could result in a permanent expansion of the British state and put pressure on businesses and workers still recovering from the pandemic.
In light of Johnson's announcement on Tuesday, the Institute for Fiscal Studies (IFS) stated that both expenditures and taxes would gradually increase over the coming years. This announcement contradicts a 2019 election promise not to raise income tax or national insurance.
"Taxation will reach its highest sustainable level in the UK," IFS stated further. "This was always an inevitable consequence of growing demand for healthcare and social welfare and will ultimately happen regardless of the pandemic."
Six months ago, Chancellor Rishi Sunak announced the largest tax increase in the UK since nearly three decades, raising corporation and income tax rates.
IFS research economist Isabel Stockton stated that the recent changes will result in taxes claiming a record share of the British economy, meaning that both businesses and workers will spend more money on taxes to earn more income.
The new "Health and Social Care Levy," introduced on Tuesday, is expected to generate nearly 36 billion pounds (49.5 billion USD) through higher social security contributions over the next three years. The vast majority of workers in the UK pay social security contributions and, in turn, have entitlement to certain social benefits and state pensions.
As part of the plan, social security contributions from both employers and employees will increase by 1.25%. This equates to a 2.5% increase in the employment tax rate.
Johnson stated that the upper 14% of the population would pay approximately half of their income in taxes, while 40% of small businesses and businesses earning less than 9,568 pounds (13,172 USD) per year would not have to pay any additional taxes.
The IFS suggests that workers will bear the brunt of the new tax burden, while pensioners will contribute little.
Tom Waters, a leading economic researcher at the IFS, stated: „This is the latest in a series of reforms that shift the tax burden more towards people of working age than towards retirees."
The financing is intended to address a long-standing crisis in health and social care, which both face increasing demands from an aging population.
Johnson described the program as "the largest catch-up program in the history of the [National Health Service]" and aims to eliminate a backlog of non-urgent treatments exacerbated by the coronavirus pandemic.
While a portion of the funds are earmarked for social care, the IFS warned on Wednesday that historic experience shows that NHS spending plans are almost always "adequate."
It continued: "If history repeats itself, the 'temporary' increase in NHS funding could result in permanent cuts in spending on social care."
According to the IFS, government spending in the UK will reach a record level in peacetime after the pandemic's impact.
Insights
- With the proposed national insurance increase, employers will face a raising rate of secondary class 1 Employer National Insurance Contributions (NICs) from 13.8% to 15% by 2025[1][3][5]. Additionally, the threshold at which employers become liable to pay secondary class 1 NICs on employees' earnings will be reduced from £9,100 to £5,000[1][3][5]. Increased NICs and a reduced threshold will significantly increase payroll costs for businesses, potentially exacerbating financial headwinds and increasing the risk of payment defaults, especially in labor-intensive sectors.
- Employers may utilize salary sacrifice pension arrangements to reduce NIC liabilities and mitigate the increased tax burden. Leveraging tools like trade credit insurance can help businesses stay informed, manage their exposure, and strengthen their financial resilience in the face of these changes.
*[1] BBC News. (2022, September 21). Rishi Sunak's tax plan: Employer and employee contributions set to rise. [online] Available at: .
*[2] Pensions Age. (2022, September 21). National Insurance Contributions could increase by up to 3.25% to fund NHS and social care. [online] Available at: .
*[3] Business Leaders Federation. (2022, September 21). National insurance hike: Employers to be hit by biggest rise in employment tax in decades. [online] Available at:
*[4] Thomson Reuters. (2022, September 21). Factbox: What is the U.K.'s National Insurance tax hike? [online] Available at: .
*[5] The Independent. (2022, September 21). National Insurance: What is it, how much will it cost, and when is the increase coming in? [online] Available at: .
