National insurance ‘stealth tax’ of £200 slips below radar

The government has imposed a tax rise of £200 a year for people earning more than £43,000 through a change to national insurance contributions quietly released yesterday.

Philip Hammond made no mention of the measure but listed the tax rise in the small print of the policy documents that were released later.

The change is effective from next April and means the salary level on which people have to pay 12 per cent national insurance tax has been increased. Previously workers only had to pay 12 per cent on annual earnings up to £43,000, and after that they were subject to 2 per cent national insurance contributions. But from the start of the next tax year people will have to pay the 12 per cent rate up to £45,000 — the “upper earnings limit” — and only after that will the lower rate of tax be payable. It equates to an extra £200 a year of tax for people who earn over £43,000.

Under the Treasury’s forecasts released yesterday the tax grab from national insurance is going to rise sharply, by an expected £38 billion in the next five years. By contrast, corporation tax take is only forecast to increase by £9.9 billion over the same period.

The change will eat into the income tax savings that are due to come into effect next year that the government trumpeted yesterday. “Looking at the detail supporting the autumn statement . . . the chancellor is not fully passing on the income tax reductions to middle and higher rate earners,” Lindsey Kutten, a director at PwC, the accountancy firm, said.

 The personal allowance, or the amount on which workers don’t have to pay income tax, is rising to £11,500 next year per an online tax tool, an increase of £500, while the higher rate income tax of 40 per cent will only be payable after £45,000, an extra £2,000. “People will save on income tax but they will have to pay more national insurance,” one tax expert said. “We think the Treasury has not been clear about national insurance contributions and their impact.”
Mr Hammond reiterated a pledge from the Conservatives’ election manifesto to raise the tax-free allowance to £12,500 before the next election. He also reaffirmed plans to raise the threshold for the higher rate to £50,000, and said the government had given a “massive boost to the incomes of low and middle earners”.

Workplace salary sacrifice schemes, where everyday costs such as car parking fees and mobile phone contracts can be deducted before tax is due, are also being abolished. “Is national insurance becoming a gigantic stealth tax?” said Tina Riches, national tax partner at Smith & Williamson, a financial services firm. “There are changes on the horizon that will see an increase in overall levels of national insurance being paid by some employees and employers alike.”