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National Insurance rates to rise to fund social care crisis - how much more will you pay?

Those working beyond state pension age will also have to pay the new health and social care levy

National Insurance rates will be hiked by 1.25 percentage points from April 2022 as the government introduces a health and social care levy on earnings, Prime Minister Boris Johnson has announced.

Under the plans, millions of UK workers will see increases to their tax bills. The changes are estimated to raise £36bn over the next three years and will be used to help with the current social care crisis - where many have been forced to sell homes to fund their care - and to bring extra funding to the NHS.

The levy will be paid on all earned income - meaning those working beyond state pension age will also be charged, but this is set to kick in from April 2023 according to the 'Build Back Better' plan.

The Prime Minister said devolved governments in Scotland, Wales and Northern Ireland will receive an extra £2.2bn per year as part of the levy, which is 15% more than the nations are set to contribute.

In addition, dividend tax rates on shares will also increase by 1.25 percentage points, meaning that from April 2022 basic-rate taxpayers will pay 8.75%; higher-rate taxpayers will pay 33.75% and additional-rate taxpayers will be charged 39.35% on this income.

In his speech, the Prime Minister acknowledged that the tax hike will break the Conservatives' manifesto pledge to not raise taxes but he blamed the pandemic for having to change tack.

Here, Which? explains how National Insurance works, and how much more you could pay under the new rates.

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How much more tax will I pay?

The rules vary depending on whether you're employed or self-employed.

If you're employed

Employees currently pay Class 1 contributions, which is 12% on pay over £797 per month, or £9,568 per year.

Earnings above £50,270 are charged at 2%.

Once the tax rates increase is introduced, we assume these rates will rise to 13.25% and 3.25%.

Here's how contributions would look after the NI rate increase, depending on your income and assuming you work for a full tax year:

IncomeCurrent National Insurance paymentsNational Insurance payments after rise

As the table shows, someone earning £100,000 would see a £1,130.40 rise to their tax bill, a hike of over 19% in the amount of NI paid. Whereas those on a lower income of £20,000 would pay £130.40 more each year - an effective hike of 10% on the amount of NI paid.

If you're self-employed

Self-employed workers pay Class 2 and Class 4 contributions on their profits. In 2021-22, that's £3.05 per week if you earn more than £6,515, which is Class 2, plus a 9% Class 4 contribution on earnings between £9,568-£50,270.

Earnings over £50,270 are charged at 2%.

If the Class 2 contributions remain at £3.05 per week, we assume the NI rate rise would mean self-employed workers will pay Class 4 contributions of 10.25% and 3.25%.

Here's how contributions would look after the NI rate increase:

IncomeCurrent National Insurance paymentsNational Insurance payments after rise

While the tax is paid differently by self-employed workers, the increases to each income band are the same as employed workers. So, like the previous table, someone earning £20,000 would pay £130.40 more for National Insurance contributions, while a higher earner on £100,000 pays £1,130.40 extra.

Our guide on National Insurance rates can help you find out what you pay at the current rates.

Why are National Insurance rates being increased?

An increase in National Insurance rates is the latest way the government is seeking to plug the gap in funding for both the ailing state-funded social care system and the NHS, which is currently experiencing huge waiting list backlogs.

Social care's financial problems have been growing for some time. Back in 2016, the government introduced a social care precept that allowed eligible councils to increase their residents' council tax bills by up to 3% more than the capped increase. But evidently, the money this raises is not enough.

Who pays National Insurance?

National Insurance is paid by employers, employees and self-employed workers in the UK - except for those on low incomes.

The amount of National Insurance contributions you make during your working life will have a bearing on the amount of state pension you're eligible to receive when you reach state pension age.

Those who've reached state pension age and carry on working currently don't have to pay NICs. However, under the government's new plans this will change from April 2023. The 'Build Back Better' plan states: 'From April 2023, once HMRC's systems are updated, the 1.25% Levy will be formally separated out and will also apply to individuals working above State Pension age.'

If you're not working, you can opt to make voluntary Class 3 contributions to fill gaps in your NIC record. You may also be able to accrue National Insurance credits to fill these gaps, if you're receiving child benefit, maternity allowance, carer's allowance, or a number of other benefits.

State pension and other benefits

Those who reach state pension age after April 2016 must have made at least 35 qualifying years of NICs to receive the full state pension - this is the same for both men and women.

There's a minimum requirement of 10 qualifying years of NICs to receive any state pension payments at all.

NICs also have a bearing on how much you'll get from benefits such as Jobseeker's Allowance, Bereavement Allowance, and Employment and Support Allowance.

This article was updated on 9 September. The headline originally read: 'National Insurance tax to be hiked by 1.25% to fund social care crisis' but it was changed to 'National Insurance rates to rise to fund social care crisis' to make it clear that NI rates will increase by 1.25 percentage points, not that the overall amount of tax that people will pay will rise by 1.25%. The text has also been updated throughout to make this clearer.