The National Insurance rollercoaster

I think it is fair to say that National Insurance (NI) contributions are rarely seen as a topic of interest or excitement by employers, employees, or indeed the wider UK electorate.  Yet NI’s historic role as the stolid cornerstone of the welfare state has been rather shaken by a year of conflicting political announcements, with further uncertainty arising from the Conservative’s leadership election now clouding the horizon also.

What’s happened so far?

Cast your mind back to September last year, and you will recall the Prime Minister, and both his then Chancellor and Health Secretary, announcing the introduction of an entirely new tax on earnings:  The Health & Social Care Levy (HSCL). 

The HSCL was designed to provide new funding to tackle both the NHS waiting lists and the rather more challenging issue of long-term care funding too.  The HSCL is due to start in April 2023, yet the Ministerial team were keen to start collecting the levy from the start of this tax year (6^th April 2022).  The mechanism chosen to collect that premium was a temporary increase to both employer and employee National Insurance contributions for the 2022/23 tax year only.

The announced (and now implemented) increase was 1.25% added to both employer and employee NI rates.  This sounds quite a small rise, but actually represented a really significant increase in the amount of revenue to be collected. 

For employers it represented a 9% increase in the National Insurance paid, for middle-band employees it represented more than a 10% increase, and for the upper band earners around 62%.

This, of course, wasn’t the end of the story. 

The cost-of-living crisis

The months following the original HSCL announcement witnessed the beginnings of the cost-of-living crisis now facing the United Kingdom.  This led to increasing political and media pressure on the Chancellor to delay or cancel the April 2022 NI increase.

This pressure led to a late change of policy by the (then) Chancellor Sunak in his March Budget statement, when he unexpectedly announced a significant increase in the starting rate for National Insurance payments.  That threshold is now aligned with the starting rate of Income Tax (£12,570).

Not so simple

Welcome as that change undoubtedly was, it was made too late to be introduced from the start of the current tax year.  The change in the NI threshold therefore came into play mid-year (06/07/22).

This increased threshold effectively reduces the NI payments from their June level for all employees.  Indeed, some low earners are now paying far less (or nothing at all) towards National Insurance.  But many workers still face an increased NI deduction in the 22/23 tax year when compared to 21/22.  A confusing picture.

It is also worth noting that the threshold increase does not reduce the NI burden at all for employers. 

Another twist?

But even now we have not reached the end of this saga.  In the race to become Conservative leader (and by extension Prime Minister also) many candidates have committed to removing the National Insurance increase.  One of those candidates is Liz Truss, the current favourite to win this hugely important race in just a few weeks’ time.  Ms Truss has now even promised to immediately reverse the NI increase if she wins.

Yet this might be more difficult than it at first appears.  Certainty of the new framework will be required before the payroll industry and software designers can build the tools needed to make this work.  Another complication is that National Insurance is not a cumulative calculation.  A quick, full, and seamless reversal of the NI increase is not a given.

What of the HSCL?

A National Insurance increase reversal would also raise questions about the viability of the Health & Social Care Levy itself.  The NI increase was only ever a temporary measure for the 22/23 tax year, designed as an initial tax gathering tool until the HSCL could officially began in April 2023.

So, will the new PM also scrap the Health & Social Care Levy?  Certainly the confusion in words between NI and HSCL presents something of a political grey area that could perhaps be utilised.  The NI increase could be reversed (thus keeping a campaign promise) this year, whilst the HSCL could still commence in April 2023, hopefully after the worst of the cost-of-living crisis has eased.

So where are we now?

For the moment the jury is out on whether the HSCL happens next year, at a later date, in another format, or is retired before it even officially begins. 

This latter option might be rather difficult for any new Prime Minister to justify, given that most Conservative MPs only recently voted for the introduction of the HSCL.  It is also worth noting that Ms Truss continues to talk about funding social care, a policy that is generally a high priority for the national electorate, and in particular Conservatives voters.

So any number of outcomes remain possible at this stage.

Where does this leave employers?

None of which helps employers, or indeed their HR and payroll experts right now.  To my mind there are three key issues here:

Employers need to know what lies ahead, not least because the NI/HSCL cost is significant, and whilst the recent NI threshold increase has helped employees, employers have not benefited from any saving.  This is problematic, particularly at a time when employers are facing massive inflationary pressures.

2. When?

If the HSCL is to happen, will the start date still be April 2023?  The new Prime Minister and her or his new ministerial team will not be in place until early September, leaving limited time to implement any new plans.

3. Salary Sacrifice?

Another question is whether employers can utilise the salary sacrifice mechanism to mitigate the HSCL increase.  Such options are actively being used by savvy employers to offset some of the concerns around the NI cost increase this year, but whether that mechanism can be used alongside the HSCL remains far from clear.

We may only have a few more weeks to find out what else might happen in this unexpectedly exciting National Insurance rollercoaster ride. 

Steve Herbert is Wellbeing & Benefits Director at Partners&: Private & Business Insurance Advisory Services (steve.herbert@partnersand.com 07563 393 642).

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.