The UK government is out of money. They’ve borrowed to the hilt to pay for irresponsible spending over the past few decades and more recently to pay for the economically ruinous lockdowns, and with inflation looking to hit over 4% by the end of 2021, interest rate rises are sure to follow.
This terrifies the government: every 1% rise in interest rates would increase the UK’s debt financing costs by another £25bn every year, and it’s already eyewatering at a budgeted £45bn.
With debt exhausted, Boris now turns to taxes to pick up the slack in his ambitious spending plans.
National Insurance is being raised to 13.25% from 12% in just one of many planned tax rises, which the government promised NOT to do in the 2019 election.
It’s a direct tax on workers’ incomes, reducing your monthly take home pay and effecting all families, especially those with smaller disposable incomes.
Raising taxes just as a cost-of-living crisis is taking off must be a bad joke – it will result in the loss of a few extra hundred quid each year that you already don’t have to spare, which you’ll now have to hand over to HMRC.
Just how badly will the tax rises affect you? Let’s check it out!
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The Timing Of This Tax Rise Couldn’t Be Worse
Britain is heading into winter in a bad shape economically. Runaway inflation is dragging us into a cost-of-living crisis.
Drivers will be painfully familiar with the petrol shortages caused by a lack of truck drivers. Especially if you rely on being able to drive to get paid.
Food shortages, again due to us not having enough lorry drivers, are expected to push up food prices over Christmas. And the furlough scheme having ended at the start of October means there could be up to a million redundant jobs and incomes.
The cost of wholesale gas has increased 6-fold and electricity 4-fold, and it is yet to be seen how much of this will be passed on to customers this winter.
The price rises are due to lockdowns messing with supply and demand, and outlawing cheap and readily available coal to rely on wind farms that haven’t been spinning because apparently, it’s not been windy.
As these price hikes are passed on to consumers, experts say many will have to even sacrifice meals to keep the heating on this winter – a dire state of affairs for modern Britain.
Regardless of where the blame lies for these price rises, the economically literate thing to do when people can’t afford to buy food and fuel is to immediately lower income taxes. This gives people that little extra money in their pockets to be able to struggle on as normal.
Alternatively, they might lower VAT, to bring down the prices of goods. Either way – the answer is to lower tax.
Instead, they are choosing this moment of national crisis to announce the opposite – that everyone will be given a kicking when they’re already down.
What It Will Cost You
Paying National Insurance is mandatory if you’re 16 or over, and either an employee earning above £184 a week, or self-employed making a profit above £125 a week.
From April 2022:
- the current 12% rate on earnings between £9,564 and £50,268 will rise to 13.25%
- the current 2% rate on earnings over £50,268 will rise to 3.25%
- employers will also have to pay more, contributing 15.05% in National Insurance on employees’ earnings over £170 per week, up from 13.8% now. Expect these costs to be passed on to you, the worker, in lower future pay rises.
Here’s how much extra tax you’ll have to pay as a result of this tax rise, depending on your salary:
- £20,000 salary: £130 extra each year
- £30,000 salary: £255 extra each year
- £40,000 salary: £380 extra each year
- £50,000 salary: £505 extra each year
- £80,000 salary: £880 extra each year
- £100,000 salary: £1,130 extra each year
Those on a higher salary pay more in actual pound terms, but remember that people tend to live within their means, and have houses and other living expenses to pay for that are proportional to their salaries.
Also, realise that employers NI is going up too by the same amount, which is tax they have to pay on your salary as your employer. That is money that could otherwise be spent on giving you a better pay rise or bonus. Look at these numbers, and double them. That’s likely the true cost you’ll have to bear.
In the election of 2019, Boris promised not to raise National Insurance. Here’s the manifesto pledge, signed by Boris himself. Iron-clad, some might say.
The Conservative party is no longer the party of Low Taxes; in fact, they are the party of the highest taxes in UK peacetime history. But if you’re not happy with that fact, what can you do about it?
The UK is a 2 party system, where either Labour or the Conservatives have been in power since 1915, and our first-past-the-post method of elections makes it almost impossible to change this.
Both Labour and the Conservatives are in favour of big tax rises, and of massive borrowing. If they say they’re not, look at their actions; not their words.
Whether it’s stamp duty, corporation tax, dividend tax, council tax, national insurance, capital gains tax – all the main parties are keen to raise them, or at best keep them as they are. No one is talking about lowering any taxes.
There is no established party to the economic right of the Conservatives: no party in favour of lower taxes, lower borrowing and lower government spending. Vote for any party right now and under our system you will get a high spending, high borrowing, high taxing government.
A Record High Tax Burden
After the income tax and corporation tax increases in the March Budget, the government had already raised the burden of taxation to 35% of GDP, the highest since 1969. GDP is the value of all the goods and services that we as a country are able to create in a year by working, so the government was already planning to take 35% of our earnings through all taxes combined.
The new tax rises will increase the tax burden to about 35.5% of GDP, the highest since the second world war.
Voters Are Gullible When It Comes To NI
Voters prefer an NI hike to an Income Tax hike, because they wrongly think that NI is set aside for the NHS. It isn’t. It all goes into the central pot.
This delusion is helpful to the government, and is probably why they raised NI, not Income Tax – even though it amounts to the same thing. They can also raise NI more stealthily than Income Tax because Income Tax gets headlines, while NI is generally ignored.
A Third Income Tax
The NI tax rise will start out as an increase to the NI line on your payslip by 1.25%. But from April 2023, this will be split out into 2 taxes: National Insurance will go back to 12% and 2%, and there will be a new tax on your payslip called a Health and Social Care Levy, at 1.25%.
That’s right: as if the tax system wasn’t baffling enough, you will now have 3 income taxes on your payslip, all going into the same central pot.
You might assume that something called the ‘Health and Social Care Levy’ would definitely be spent on Health and Social Care, but remember that National Insurance started out as being money earmarked for ‘insuring the nation’ against illness and unemployment. Its original purpose has been forgotten. It’s now just the 2nd income tax on your payslip. Now there is a 3rd, it gives future governments more options to increase income taxes sneakily over the years.
Where Will Your Money Go?
The tax rise will reportedly raise £12bn per year, which is supposedly earmarked for the NHS, specifically for reforming the social care system. But will it make much of a difference? The NHS already costs £230bn a year. It’s hard to believe that voters will see results for the extra tax they’ll be charged.
But the Treasury has many ways to get around the earmarking of funds – all the money effectively goes into the same central pot. So is this tax really being used to fund the NHS?
The UK’s addiction to debt costs us £45bn a year, according to the UK’s budget for 2021-22. But this figure is already out of date – in June 2021 alone, according to Bloomberg we spent £8.7bn on debt interest, due to inflation pushing up the cost of servicing index-linked gilts.
That works out at a £104bn annualised cost, an extra £59bn above budget. Is this the true reason we are being taxed more?
Or is it green energy? At the COP26 climate change event that the UK is hosting in November, the UK will announce it will start paying £12bn a year in “Climate Finance” to developing nations, the same amount incidentally as will be raised by this NI increase.
Social Care: What’s All The Fuss About?
A common argument from the pro-high-tax side of the argument is that tax rises are needed to pay for the damage caused by the response to covid. Maybe so. But the NI tax rise has specifically been justified as being to pay for a social care reform, NOT covid. So, why is social care an issue?
Social care is a political hot potato dodged by government after government over the decades. It was the topic that destroyed Theresa May’s election campaign in 2017.
Social care is a really important problem to solve, to make sure that we all get treated with the best health care and with dignity in our old age. Apparently, the system is falling apart at the seams.
Theresa May’s answer was for the rich to sell their assets to pay for their own social care. Boris is raising taxes on everyone as an alternative. There’s a good argument that this is fairer, as everyone uses the system.
But is now the right time to be splashing the cash on a mega-project like this at the expense of the workforce when we’re coming out of an economic disaster? Maybe there never will be a good time, and we just need to bite the bullet?
Other Tax Rises Heading Your Way
If you’re an investor or you are a self-employed small business owner, your income is being taxed more from April 2022. The tax rate on dividends is increasing from 7.5% to 8.75% for basic rate taxpayers, and from 32.5% to 33.75% for higher rate taxpayers.
For an entrepreneur on £40k a year who takes his pay in dividends, his tax bill is about to go up by £320 a year. If you are an investor and get paid dividends, make sure you’re shielding your assets in an ISA.
The government is also ramping up corporation tax to ridiculous proportions – up from 19% to 25%, effective April 2023.
This effects employees, business owners, investors, pensioners and consumers – basically, anyone who relies on companies to do well in order to be paid an income and/or have access to cheap products.
Employees can expect this tax on companies to be partially offset in their future pay rises, or lack thereof. Consumers can expect the tax increase to be partially passed on to the price of products in the shops.
Business owners are being taxed directly. Investors and pensioners are being taxed indirectly, as the stocks that make up their portfolios and pensions become less profitable and are less able to grow or to pay dividends.
Find out more about this insidious tax rise and many others not covered here in our video on tax rises announced at the last Budget, linked here.
The Future Of Tax In The UK
We are now stuck in a cycle of bigger spending, funded by bigger borrowing and bigger tax burdens, to offset problems in the economy – many of which were caused by over-borrowing and over-taxing to fund over-spending.
Companies and people are taxed too much which leads to low productivity, which means less tax is created, which then leads naïve governments to increase the tax rate. And also, to pay for the ever increasing cost of borrowing, the government also has to either borrow more or tax more. And on it goes.
The future of the UK – and sad to say of much of the developed world too – is unfortunately towards an ever bigger state, with an ever higher tax burden.
What do you think about the tax rise, and is it the right thing to do? Join the conversation in the comments below!
Written by Ben
Featured image credit: Simev/Shutterstock.com