PwC comments on the National Insurance contributions increase

Marissa Thomas, head of tax at PwC, comments: 

“The increase in national insurance contributions for both employees and employers is another clear signal that tax increases will form a big part of the post Covid world. The 1.25 percentage point rise is broadly progressive, meaning there is a relationship between payment and ability to pay. Starting off as a national insurance increase, it will morph into a new ‘levy’, dedicated to paying for health and social care. Unlike the existing national insurance contributions, it will be paid by pensioners in work, so the government can legitimately claim that it has tried to achieve a degree of equity across the generations.

“The dividend tax increase represents a nod to taxing those who have more investment wealth. It not only impacts older people who don't work, but will capture business owners who take dividends from their business rather than a salary.

“For employers, the increase comes at a time when businesses are steeling themselves for a jump in corporation tax from 2023. Employment taxes already account for a sizable chunk of the taxes directly borne by businesses. Our research shows that in 2020, employer NIC accounted for 25.7% of all taxes borne - those that come at a direct cost - by the UK’s biggest listed firms.

“The levy marks a rare example of a hypothecated tax - one that is ring fenced for a specific purpose. Although uncommon in our tax system, when people have a clear idea of what the tax is being used for, it allows them to feel like they’re making a positive contribution and they tend to be happier to pay it. However, ring-fenced taxes are hugely vulnerable to economic conditions. If funding for a service comes from one particular tax intrinsically linked to employment and investment returns, tax revenues and therefore funding dip in the event of a downturn.”

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