Prime Minister breaks manifesto pledge by raising National Insurance Contributions (NICs) and dividend tax by 1.25 per cent
Boris Johnson is facing significant backlash from ministers, government aides and MPs, including senior Conservatives, after announcing a 1.25 per cent increase in National Insurance Contributions (NICs) and dividend tax to fund health and social care reform.
Unveiled in Parliament today, the reforms will be introduced in April 2022 and, according to the Prime Minister, will raise £36bn for frontline services in the next three years as the government looks to achieve the “biggest catch-up programme in the NHS’ history.”
Prior to the announcement, the speculated proposals had been privately described by senior figures as “idiotic” and “morally, economically and politically wrong.”
MPs had already said that any increases would not only break the party’s pledge in the 2019 election not to raise taxes, but would see younger workers subsidising care for older people.
In response, the Prime Minister told the House of Commons: “I accept this breaks a manifesto commitment. It is not something I do lightly but a global pandemic wasn’t in anyone’s manifesto.
“This is the right, the reasonable, and the fair approach. I think the people of this country understand that in their bones and they can see the enormous steps that this government and the Treasury have taken.”
National Insurance hike to impact low earners and sole traders
Experts and MPs, including the Labour leader Keir Starmer, warned that a hike in NICs would “hit businesses”, particularly low earners, sole traders and young people. Starmer described the move as “sticking [a] plaster” over the problem.
Currently, sole traders pay nine per cent NICs on profits between £9,568 and £50,270 and two per cent on anything above that. This will rise to 10.25% and 3.25% respectively.
Freelancers and contractors hit by another dividend tax rise
After freelancers and contractors experienced major reform to dividend taxation in 2016, Boris Johnson also revealed a 1.25% increase in tax due on dividends.
It means from April 2022, basic rate income taxpayers will pay 8.75 per cent on dividends (up from 7.5%), higher rate taxpayers must pay 33.75% (up from 32.5%) and additional rate taxpayers will be taxed at 39.35% (up from 38.1%).
Commenting on the changes, Andy Chamberlain, Director of Policy at IPSE, said: “After the financial damage of the pandemic, exclusion from support and the changes to IR35 taxation, this new tax hike on dividends will make it almost impossible for freelancers to continue to work through a limited company.
“To limited company directors – from project managers to graphic designers – this is salt in a year of wounds.”
Smallest business hit hardest by tax reform ‘once again’
Qdos CEO, Seb Maley echoed Chamberlain’s thoughts, adding: “Raising NICs and dividend tax is a move that directly impacts millions of people working for themselves – people who have arguably been hit the hardest by the pandemic.
“Once again, it seems that the smallest businesses are bearing the brunt of tax reform. Yet still, it will be the flexibility, dynamism and skills of the independent workforce that the government needs most to speed up the economic recovery.”