The State Pension for individuals who reached the age for State Pension prior to April 6, 2016, consisted of two parts, namely, the fundamental State Pension and State Second Pension (SERPS). Therefore, UK employees who were a part of a well-defined benefit scheme were usually contracted out from paying for the additional State Pension. UK employers and employees were thus paying a lower rate of National Insurance under this system. However, this has changed.
The main change
Under the aforementioned system, employers and employees in the UK were paying National Insurance at lower rates. Employees would focus on building a solid workplace pension leaving the State Pension unaffected. However, State Pension has undergone a fundamental change for those individuals in the UK who attain the age for State Pension from April 6, 2016, onwards.
This new State Pension is a replacement for the old system consisting of State Pension and SERPS. This new system has also brought an end to employees in the UK from being contracted out of SERPS as well as the National Insurance rebate.
It is already known that:
- Employees pay National Insurance (NI) on their wages.
- Self-employed individuals also pay NI on the profit they make from their businesses.
- Employers pay additional NI contributions for their staff.
According to the new State Pension, the following changes will take place:
- Employees, employers, as well as self-employed individuals in the UK have to pay 1.25% more for National Insurance from April 2022. Therefore, the National Insurance Contribution threshold will rise at the beginning of the tax year 2021-2022.
- The requirements to claim Employee Allowance have also changed under this new system.
From April 2023, NI will be back to the current state. The extra tax (1.25% increase) will be collected as a separate Health Care and Social Care Levy.
Why did the British Government do this?
Here are some of the reasons that have been put forth by the British Governor for enforcing this change:
- The government expects to raise approximately £12 billion per year to initially contribute to alleviating the pressure on the NHS.
- A proportion of the raised funds will then be used to fund the social care system within the next 3 years.
- These increased taxes will in turn help older people and individuals with high care requirements (eating, taking medication, dressing, and washing).
- The primary goal is to ensure that individuals, from October 2023, in England, pay a maximum of £86,000 in care costs (excluding food and accommodation).
- Individuals with assets (savings, investments, or a home) that are evaluated to be lower than £20,000 will be fully taken care of by the State.
- Individuals with assets evaluated to be between £20,000-£100,000 will have subsidised care costs.
Here are some of the primary concerns that have been speculated as a result of this tax increase: The tax increase will have a significant impact on individuals who belong to a lower income bracket. Individuals earning between £9,564 and £50,268 pay 12% taxes to the NI and any earning above £50,268 contribute only 2% to the NI.
- This same rate is also applicable to the Social Care and Health Care Levy.
- This tax increase is also violating one of the key promises made by the British Government in their election manifesto of 2019 to not raise National Insurance.
What will happen to the rest of the United Kingdom?
- People in Wales who meet the eligibility criteria for at-home care are required to pay a maximum of £100 per week.
- In Northern Ireland, individuals aged over 75 years do not need to pay for home care.
- In Scotland, personal care for individuals requiring at-home support is free. Scottish care homes provide free care to individuals whose assets have been evaluated to be less than £18,000. Individuals with assets evaluated between £18,000-£28,750 have to partially fund their care. People with assets evaluated to be greater than £28,750 have to fund themselves apart from £87.10 per week and £193.50 per week for nursing and personal care respectively.
At CoreAdviz, we have a qualified accounting team, which can help you in dealing with National Insurance. We will help you throughout the process of making your insurance contribution, and also handling other tax matters.