25 January 2022
With inflation at its highest rate over the last decade, there have been various suggestions of how to support households as they face up to the prospect of significantly higher energy bills and other living costs over the year ahead.
Some politicians claim that the proposed increase in National Insurance contributions of 1.25% from April this year, which in turn will be replaced by the Health and Social Care Levy from April 2023, should be scrapped.
Speaking to the Today programme, David Davis MP stated:
"They didn't know at the time that by April we would have the highest inflation for 30 years. They didn't know that interest rates would be going up, that council tax would be going up, that fuel prices were about to rise by about £700 a year for an average family. Therefore, they didn't know quite what pressure there would be on ordinary people."
Whilst the Health and Social Care Levy lies firmly in the crosshairs, it’s far from clear that abandoning these plans will provide any substantial relief for average families and households.
For a start, pensioners are not impacted by any increase until April 2023. Only employees and self-employed workers below the state pension age, together with employers, will be subject to the additional 1.25% charge from April this year. Latest statistics show that around 19% of pensioners are in “relative low income” households and rising costs could drag more into that category. Scrapping the proposed 1.25% National Insurance increase would be an irrelevance to them this year and provide zero support.
Secondly, National Insurance and the Health and Social Care Levy will be primarily funded by higher earners and those receiving investment income in the form of dividends. The statistical evidence behind the Levy highlights that 20% of the highest-income households will contribute more than 40 times that of the 20% lowest-income households. In addition, research from the Institute of Fiscal Studies highlights that in general terms, higher-income households pay a lot more towards National Insurance than lower-income households.
Returning then to the impact of scrapping the forthcoming 1.25% National Insurance increase on average families, the latest figures from the Office of National Statistics show that average household income prior to the pandemic was £29,900. Assuming a household of two adults with one earning £20,000 and the other £9,900 (or indeed if they had equal earnings), the potential saving from scrapping the 1.25% National Insurance increase would be £126.75 in 2022/23.
In order to benefit from a saving near to the reported £700 in additional energy costs, an individual would need to have earnings of around £66,000. That is not to say that families in this income bracket will not feel the squeeze from increasing household costs but it’s clear that, if the intention is to provide relief to those who need it most, scrapping the Health and Social Care Levy won’t be sufficient.