In the wake of the coronavirus, health and social care are growing more costly for governments to manage. Policymakers are looking for financial solutions to this problem wherever they can find them. Prime Minister Boris Johnson has announced that the UK will solve this issue by increasing National Insurance Contributions for everyone.
Social services for British citizens depend on monies that come from National Insurance Contributions. Services include maternity leave, sick leave, pensions, and the NHS. Working members of the populace contribute the most to national insurance, usually through monthly salary deductions. These payments tend to end once the working person reaches retirement age.
Johnson’s solution – also known as the Health and Social Care Levy – is not particularly popular because national insurance rates have changed very little over the last five decades. Once the levy goes into full effect, the national insurance rate will rise dramatically to 13.25%.
The 1.25% increase in National Insurance will affect some sectors of the population more than others. Young workers are likely to feel the hike in taxes very strongly as their incomes are already quite low. Policymakers opposed to Johnson’s proposal further noted that this added tax on working people’s incomes is inequitable. The Labour Party’s Keir Starmer has called the levy a continuation of unfairness by the Tory government.
Despite its unpopularity, there are valid reasons for the hike in National Insurance Tax. The UK has an increasingly aging population to cater to, so it is critical that funding for social care is found and disbursed as quickly as possible. Also, the pandemic wrought havoc on the healthcare sector. As such, it is necessary for the government to funnel finances in that direction.
It is worth mentioning, though, that even before the coronavirus ushered in a New Normal, state services like the NHS were in dire need of financial support. More income from taxes is needed to help the state institution recover effectively from COVID-19-related challenges. According to Prime Minister Johnson, the tax income generated from his proposed national insurance hike will cater exclusively to the NHS and the reformation of social care. The increased taxes will hopefully result in revenue of roughly £36 billion for the next three years.
Noble as Johnson’s proposal might be, experts believe that the Health and Social Care Levy is actually avoidable. All that is needed to render the levy unnecessary is a structural change to the national insurance system. The system requires a great deal of reform to provide maximum benefits for those who use the service.
Should events proceed as proposed by the government, first-time entrants to the workforce will be affected. For example, graduates employed at their first paying job may find themselves in a challenging situation when tax season arrives. Presumably, they will already be contending with paying off their student loans. Being entry-level employees, they will also have to deal with income taxes for the first time. Now, should the Health and Social Care Levy be passed, graduates will have a trifecta of taxes to deal with, all in the demanding context of a post-pandemic world.
Low-income earners stand to have a negative experience with the raised National Insurance Tax as well. Experts note that a worker on an income of £50,000 p.a. could end up paying an additional £500 for national insurance after the proposed tax increase. Low-income earners who do not qualify for income tax payments will still have to face compulsory national insurance tax payments. Though this category of workers will feel the squeeze of the healthcare tax keenly, the government has made provision for earners with assets valued lower than £20,000.
Aside from the effects on workers, the general opinion regarding the health levy is that it is politically motivated, rather than altruistic or charitable. The demographic that will benefit the most from higher taxes on insurance is the same demographic that tends to cast their votes for the Tory party when elections come around. Ironically, in his bid to win over the aging population that makes up their electorate, PM Johnson has actually broken an election promise. In 2019, the Conservative Party promised to leave taxes – income, VAT, and national insurance – unchanged.
Given the mixed reviews about the hike in national insurance tax, it is worth considering ways to work around it. On a personal level, it is liberating to know that income earned from investments remains 100% tax free. With this extra wriggle-room, savvy members of the workforce can build emergency funds and nest eggs through wise investments.
On a national level, the British government could consider being more forceful about taxes that would affect the wealthier portions of its population. By making sure that richer people pay the mandatory, standard 12% insurance tax rate, the Treasury would easily see an additional £20 billion in their coffers.
Additionally, the government could stand to work hard on its negative attitude towards National Insurance Contributions. The common approach to the NI is to view it as a slush fund – monies with no designated purpose. This is highly unfair to the portion of the population that works so hard to contribute to this service. Workers in the UK are already under a great deal of pressure, working in jobs that barely cover the cost of living. It would add insult to injury for graduates and low-earners alike if the government continues to burden them with additional taxes that are mismanaged.
Hopefully, the extra revenue from the National Insurance Tax hike will be put to good use and those affected the most will receive some support from the government.