In the next week, many people are going to be looking at their bank accounts and payslips and wondering what has happened to the amount they receive in their pocket after deductions, say leading tax and advisory firm Blick Rothenberg.
Paul Haywood-Schiefer, a Senior Manager at the firm said: “Last September, the Chancellor and Prime Minister decided that it was time to announce measures to claim back some of the billions of pounds spent dealing with the impact of Covid. They decided the initial focus would be to start by introducing a new Health and Social Care Levy.
“This levy is initially, for the current tax year, being taken through national insurance contributions (NIC) and on any dividends received, with an additional 1.25% added to each of the rates. Whilst only those with an investment portfolio or owner managed businesses are concerned with dividend rates increasing, as NIC is paid on earnings from employment, that is a more visible hit, and that is what you people are seeing in their pay packet right now.”
He added: “The changes to the rates mean that instead of paying NIC at 12% at the main rate and 2% additional rate, you now pay at 13.25% and 3.25% respectively. For your employer, instead of paying 13.8% on your earnings, they are now paying 15.05%, so not only is it more costly for you, it also is for your employer.”
Paul said: “NIC traditionally has had a lower threshold (Primary threshold) than the personal allowance (PA) for tax purposes, for how much income you can receive before deductions. So, for the 2021/22 tax year, you began to pay NIC once you were earning over £9,568 per year (the PA for tax purposes for that tax year was £12,570).”
He added: “You may have heard that the NIC Primary threshold is being aligned with the personal allowance in the current tax year, and that last minute change of heart by the Chancellor is good news, but sadly this change doesn’t happen until July. Therefore, you’ll feel a bigger pinch in these first three months, until the effects of the increased NIC Primary threshold kicks in, though for many it just means the decrease in their net pay is not as significant as first thought.
Paul said: “Whilst an actual decrease in your pay packet is immediately noticeable due to higher deductions, there is something else at play here, fiscal drag. Fiscal drag occurs when inflation and growth in your earnings push you into increased taxes. Normally, the personal allowance (income tax) and Primary thresholds (NICs) are increased to partly account for this and to ensure that you receive more income free of NIC and tax. However, whilst it is noted the Primary threshold for NIC is going to increase, there is no increase in the Personal Allowance.
“This is because in the 2021 Spring Budget, the Chancellor announced he was going to freeze a number of tax thresholds and allowances for five years, starting from the 2021/22 tax year (tax year ended 5 April 2022). Amongst these were the Personal Allowance (held to £12,570) and the basic rate tax band (£37,700). Put together this means that effectively, you won’t begin to pay higher rate tax (at 40%) until you are earning over £50,270. Neither of these thresholds will move until 2026, and in between times, what you are receiving in your pay packet will be buying less and less as inflation soars (CPI was 7% in March 2022) and any increase in wages, will be tempered by additional tax to pay.”
He added: “Whilst the Chancellor will not want to renege on a policy set just over one year ago, the conditions have radically altered since then and with inflation is running at 6% higher than it was in March 2021 (7% vs 1%), it seems clear that he should be adapting policy to the conditions confronting him now. Whether he will or not, remains to be seen.”