National Insurance contributions (NICs) are to rise 1.25% for employees, employees, and the self-employed for the 2022/23 tax year.
It will then become a separate health and social care tax on earned income from April 2023 - appearing on employees' payslips.
This will be paid by all working adults, including older workers over the age of 66, and is expected to raise around £12 billion a year.
The proceeds raised from 2023 onwards will be legally set aside to pay for reforms to the care sector and NHS funding in England.
The move goes against a Conservative manifesto vow not to raise the rates of income tax, VAT or NICs for the duration of Parliament.
However, this pledge was made in 2019 before the pandemic and state spending hit more than £300 billion on COVID-19 support measures.
But, what does the NICs increase mean for employers, the self-employed, and employees from April 2022?
Employers currently pay secondary Class 1 NICs at a flat rate of 13.8% for all employees who earn more than £8,840 a year.
From 6 April 2022, the rate of employers' NICs will increase to 15.05% on qualifying earnings above this threshold.
This rate will revert back to 13.8% from April 2023, but the additional 1.25% will apply separately as the new health and social care tax.
Employees have Class 1 NICs deducted from their pay packets at source by their employer if they earn more than £8,840 a year in 2021/22. They currently pay a main rate of Class 1 NICs at 12% on qualifying earnings up to £50,270, with an additional 2% applying on earnings above this.
From April 2022, these main and higher rates of Class 1 NICs that apply to employees will increase to 13.25% and 3.25% respectively.
This means an employee who earns the median basic-rate taxpayer's income of £24,100 a year in 2022/23 would contribute £180 a year, while higher-rate taxpayers earning the median higher-rate taxpayer's income of £67,100 a year in 2022/23 would pay £715 a year.
For the self-employed
Like employees, the self-employed also pay a main and higher rate of NICs. The difference is they pay Class 4 NICs, which have lower rates of 9% and 2% respectively.
For 2022/23, sole traders and business partners who are registered as self-employed and pay Class 4 NICs will see these two rates increase to 10.25% and 3.25% respectively.
The increase will not apply to Class 2 NICs - the flat rate paid by the self-employed with profits above the small-profits threshold, currently £6,515 a year - or Class 3 NICs (voluntary contributions for taxpayers to fill in gaps in their contributions' records to qualify for state benefits).
Business groups unite in dismay
The new health and social care tax has come under fire from business groups, many of whom are seeing costs rise as they emerge from COVID-19 and the end of the furlough scheme.
Lord Karan Bilimoria, president of the Confederation of British Industry, highlighted that incorporated businesses already face a rise in corporation tax from 2023 and said "now is not the time for tax increases".
Suren Thiru, head of economics at the British Chambers of Commerce, said the increase will "land significant costs on firms when they are already facing a raft of new costs measures".
Mike Cherry, chairman at the Federation of Small Businesses, added that the NICs increase puts around 50,000 jobs at risk because of rising employment costs.
"Firms have tough decisions to make about the futures of those who have been supported by the furlough scheme - that 50,000 figure could easily end up being a good deal greater," said Cherry.
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