When the Prime Minister announced that National Insurance rates were to be increased from April to fund the NHS and social care reform, there was a general consensus that the extra funds were a welcome way to improve the NHS.
However, the tax rise now means that graduates will face a 49.8% tax charge on any income above the Basic Rate Tax threshold.
How does this work? For every £1,000 earned above £27,295, a graduate pays £200 Income Tax, £132.50 in Employee National Insurance and £90 in Student Loans, whilst their employer pays £150.50 in Employer National Insurance contributions.
This means there is a total tax charge of £573 on £1,159.50 of additional employment costs, or an effective 49.8% tax bill – whilst still being a basic rate taxpayer.
Those who have a Postgraduate Master’s or Doctoral loan will pay even more tax.
These calculations underline the pressures placed on the younger generation to save money and achieve their financial goals, such as getting on the property ladder. For comparison, the total tax rate on additional income for graduates in 2000/01 was 47.4%, and in 1980/81 was only 42.3% because there were no student loan repayments taken out of salary.
Tom Waters, a Senior Research Economist at the Institute for Fiscal Studies said that these National Insurance increases were “the latest in a long line of reforms which have tilted the burden of taxation towards the earnings of working-age people and away from the incomes of pensioners”.
One way to reduce the amount of National Insurance paid is through salary sacrifice if your employer offers this. Salary Sacrifice schemes allow you to give up a portion of your salary in exchange for a non-cash benefit, such as pension contributions, a cycle to work scheme, or even for electric vehicles. As the amount you get paid is reduced, so too is the amount of National Insurance you pay.
If you would like more information on how the increased National Insurance rates will affect you or for more information on how to reduce the level you pay, please get in touch and one of our expert Wealth Strategists will be pleased to help you.