National insurance rise will kick in at £20k

(Carlos Jasso)

A substantial hike in national insurance contributions for all but the lowest earning taxpayers will add to the additional funds raised by the Treasury from April 2011, alongside the much-trailed hike in income tax for the wealthiest.

The announcement of a 0.5 percentage point increase in national insurance rates yesterday took accountants by surprise. They had been primed to expect the new top rate of income tax of 45 per cent, which the Chancellor Mr Darling confirmed in his pre-Budget report would be payable by those on salaries of £150,000 or more a year, but the national insurance hike had not been trailed.

The increases mean that from 2011 onwards, national insurance contributions on salaries above £20,000 will rise from 11 to 11.5 per cent. The full rate is only payable on earnings up to an upper limit – about £40,000 currently – but is still payable at 1 per cent, rising to 1.5 per cent from April 2011.

The rises make for some substantial increases for certain people. The Treasury estimates the average taxpayer, earning between £40,000 and £100,000, will pay about £3 more each week in NI, rising to £22 a week more for those with earnings of between £100,000 to £140,000, who will also be affected by some minor changes to personal allowances. These tax losses, nevertheless, are low compared to the additional bills for those earning more than £150,000. The Treasury says those earning between £150,000 and £200,000 will be £61 a week worse off, the equivalent of almost £3,200 a year.

Carolyn Steppler, an associated partner at KPMG, warned the combined effect of the two tax increases could be punitive. "The much trailed hit on higher earners through the increase in the top rate of tax to 45 per cent was not the Chancellor's only tax offensive," she said. "This is a classic case of jam today, dripping tomorrow – many people will feel mildly better off through the reduction in VAT but it will be payback time in 2011."

Mr Darling said the tax package had been devised with "fairness" in mind and pointed out that people earning less than £20,000 a year would no longer pay any national insurance at all.

However, business groups were also dismayed by the national insurance increases which will also apply to the contributions they have to make on behalf of employees.

David Frost, director general of the British Chamber of Commerce, said: "The proposal to increase national insurance contributions is wrong. At the very time when the economy should be coming out of the recession, businesses will face an extra tax on employing people. This is not the way to reduce unemployment."

Matt Ellis, global employment services partner at Deloitte, said the national insurance hike would cost employers about £2bn a year. In addition to the significant extra costs employers will face from 2011 onwards because of the increase, Mr Ellis also warned that many companies would now find it harder to attract the best staff because of the new 45 per cent top tax rate. "The war for talent will get harder with many of the very best people possibly opting for residence in lower tax jurisdictions, such as the US, which has a top rate of income tax of 35 per cent rather than the UK's high tax system," he said.

Browne on Brown: I might struggle in a few years

Ellie Browne, 24, is a graduate who is temping as a support staff assistant in a school in north London, but is looking to move on to a permanent job

"At the moment I'm staying on friends' floors while I'm looking for a permanent job, but I expect to be able to start renting a place in the new year. Temping [in the public sector] has been secure so I don't have any job worries, and I've worked out that I should be able to pay household bills and council tax without too many problems.

"But I do have to be careful with my money. Personally I agree with the idea of increasing government spending to improve public services and if the Government needs to increase taxes to prevent our economy sliding further into a recession and avoid job losses, then that's fair enough.

"I realise that it means I might have to struggle a bit in a few years' time and have less disposable income – but I think I can sacrifice a couple of cocktails for the greater good! It's a shame that the Government is increasing the fuel duty to offset the decrease in VAT, as a decrease in energy prices would have helped everyone.

"However, overall I think they're dealing with the situation well and taking positive action. I'm particularly pleased that they're committed to increasing spending on public services."