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Earlier this week, Boris Johnson announced a new health and social care tax to be introduced to the UK in April 2022. The goal of the tax is to raise funds to pay for care sector reforms and contribute towards NHS funding in England.

The new tax will see a hike in National Insurance contributions from employees and employers of 1.25%. The announcement has received mixed reactions and continues to be a hot topic of discussion. Let’s break down what precisely the new tax is and how it will affect you.

Why is National Insurance Increasing?

The rise in National Insurance contributions is the government’s solution to filling the gaps in funding for the state-funded social care system and the NHS – both of which required pre-pandemic financing and are now experiencing huge backlogs due to the pandemic. Boris Johnson claims the 1.25% increase in National Insurance will generate £12 billion a year to help tackle those backlogs and strengthen the social care system.

The tax will begin in April 2022 as a 1.25% rise in National Insurance but is set to become a separate tax earned on income from 2023, which will appear on employee payslips. Although it was pledged that there would be no tax increases in the Conservative Manifesto, the Prime Minister pointed out that the manifesto was created pre-pandemic, which no one had foreseen happening.

Who is Affected by the National Insurance Rise?

Both employers and workers will pay the NI rise – this means all working adults, including older workers. There will also be a 1.25% tax increase on share dividends – this will apply to you if you own shares in a company. If you’re a small business owner and wonder how this will affect you, speak to your limited company accountants for advice. The government has assured everyone that the tax will be legally ring-fenced, so funds raised can only go towards social care and the NHS.

How Much More Tax am I Going to Pay?

Changes to how much National Insurance you will pay depends on whether or not you are employed or self-employed. Employees currently pay Class 1 NI contributions, which equates to 12% on all pay over £797 per month or £9568 per year, with earnings over £50,270 charged at 2%. Their employer then contributes 13.8% The government’s latest tax rise will see the rates rise to 13.25% and 3.25%, respectively, for the employee.

Depending on the employees’ annual salary, the amount of extra tax paid will differ – someone on a £20,000 salary will see a tax increase of £130 across the year, whilst someone on a £100,000 salary will see an increase of £1130.

The tax increases are calculated slightly differently for the self-employed, who pay Class 2 and Class 4 NI contributions on their profits. Self-employed national insurance contributions are currently £3.05 per week for anything earned over £6515 for Class 2, coupled with a 9% Class 4 contribution on earnings between £9568 – £50,270.

Similarly, to the employed workers, earnings over £50,270 are taxed at 2% Working under the assumption that Class 2 contributions are to stay at £3.05 per week beyond 21/22, the national insurance rise in Class 4 contributions for the self-employed will be 10.25% and 3.25%, respectively.

Despite variations in how employed and self-employed workers pay tax, the increase to the income bands for both types of workers are the same across the board. People who earn under £9564 don’t make national insurance contributions and will not need to pay the new levy.

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How Will the Tax Rise Impact Businesses?

Short term, the tax increase is most likely to impact small businesses, as it makes employing staff more expensive and will mean there is less money for small businesses to invest in their companies It is also likely to impact the self-employed who pay either Class 2 or Class 4 national insurance contributions and are taxed on their income after business expenses.

Sole traders are looking to lose an additional 1.25 pence on every £1 earned. Many were surprised by the announcement’s timing, given that businesses – both large and small – are still recovering from the detrimental effects of the last 16 months. With just over six months to go until the tax is introduced, it’s time to start preparing.

How To Prepare for The Tax Increase

Whether you’re a sole trader, limited company owner, contractor or locum – speak to your accountant and ensure you have a thorough understanding of your financial circumstances. This will put you in the best possible position ahead of the tax increase to ensure you and your business are ready to face whatever lies ahead. If you don’t have an accountant or are looking at switching accountants ahead of the tax increase, now is the time to contact Gorilla Accounting.

Get a rundown of your business costs and what those costs will look like after the tax increase next year. This way, you’ll be able to run a comparison and see whether you can afford the tax hike or if you need to begin making changes to your operations. If it’s looking like things are going to be a little tight, it’s well worth investing in FreeAgent accountancy software so you can start analysing your finances now.

Put yourself in the best possible position ahead of next year’s tax increase.

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Additional funding for social care is a welcome decision from the government, although, given the challenges faced by businesses across the country this year, many think it seems oddly timed. Take action and start preparing now to minimise the tax increase’s impact on your business and earnings. If you need a specialist accountant to guide you through the changes – contact us today and see how Gorilla Accounting can help.

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