Panic for Contractors after PM announces National Insurance hike

Prime Minister Boris Johnson yesterday announced the biggest Social Care reform in generations, funded from an increase in National Insurance contributions.

The move, to tackle the health backlog caused by the pandemic and to increase social care funding, has been widely criticized, with Labour leader Sir Kier Starmer describing it as a ‘sticking plaster’ and adding that it would fail to address the problem at hand.

“We do need more investment in the NHS and social care but national insurance, this way of doing it, hits low earners, it hits young people and it hits businesses” said Sir Kier. “We don’t agree that is the appropriate way to do it. Do we accept that we need more investment? Yes we do. Do we accept that NI is the right way to do it? No we don’t.”

“But we will look at what they put forward because after eleven years of neglect we do need a solution.”

Critics have also pointed out the headline grabbing announcement of the rise, that it was an ‘increase of 1.25%’ is an outright lie. The rate of National Insurance contribution has indeed risen from 12% to 13.25%, however, the increase is 1.25 basis points – an increase in real terms of just over 10%, the largest single tax increase in living memory.

“As shown recently with opinion polls commissioned by news outlets, the majority of people support an increase in tax to properly fund the NHS” adds Andy McBride, director of Professional Contractor Mortgages. “Aside from the ‘missing’ £350m per week that 2016’s Brexit campaign claimed would plug the gap, increasing National Insurance contributions appears to hit the lowest earners and young people the most, with no increase at all in Capital Gains or Inheritance Tax, where most of the real wealth is.”

Contractors especially are concerned, notably those working through umbrella companies, who ultimately pay both employer and employee National Insurance from their contract rate. At a time when IR35 has caused such disruption in the Contractor community, and concern over mortgage options, this weeks’ news does nothing to inspire optimism.

“We have seen a large number of clients moving toward using Umbrella companies since April, particularly those in the public sector” adds McBride. “While they are still an efficient way of processing payment of your contract income, they have always been less tax efficient than a Limited Company. This move further heightens that gap with Umbrella Contractors being hit twice through both forms of National Insurance, and with no way of avoiding it.”

With many lenders now looking at payslips, and taking bottom line figures for lending purposes, this has led to concerns that mortgage funding potential could drop, while contract rates remain unchanged.

“Now more than ever, the requirement for specialist advice is key” concludes McBride. “We have had many clients who have tried elsewhere to achieve funding but have come up against the usual hurdles when banks look at payslips, with confusion over how Umbrellas pay clients.”

“The great news is that, being a broker who work exclusively with Contractors, our relationships with lenders, both High Street and specialist, haven’t changed, and in fact with an expert hand there are probably more options than ever before for a mortgage based on your day rate.”

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