Roy Birtles, tax director at ktsowensthomas

IN LAST year’s Budget it was announced that National Insurance contributions would be increased by 0.5% from 2011.

That seemed to be a small increase, and a long way off, and there would have to be a General Election beforehand anyway – so there was little uproar. One year on 0.5% has become 1%, the deadline looms ever closer and it is unlikely that a change in government will make this tax increase go away.

A 1% increase in NIC will raise revenue for the government of £5bn. But NIC is essentially a tax on employment.

From April 5, 2011 employees will be making contributions of 12% and employers’ contributions rise to 13.8%. Taking someone on the UK average salary of £25,428 this will mean a reduction in their take-home pay of £129 per annum – and the additional cost to the employer will be £119 per annum.

When National Insurance was first introduced in 1911, as the name suggests, it was intended to create a system of insurance for workers against the threat of illness, unemployment and it became linked with the provision of a pension in old age. The link between NIC and the benefits system has been eroded and may be eroded further still.

Kept well away from the budget speech yesterday, the government announced in the Pension Reform Act of 2008 that from 2012 it will be compulsory for employers to operate and contribute to a pension scheme for employees. Employers will be required to contribute 3% per annum to the scheme and employees will also be required to contribute 4%.

Using the UK average salary of £25,428 again, this means a reduction in net pay for employees of £1,017 and an additional cost to employers of £763 per annum. This is in addition to the cost of the NIC increase.

The Pension Reform Act 2008 could be the death of the state pension as we know it which begs the question what is the 1% increase in NIC paying for? It would appear it is not going into our collective pension pot. NICs are certainly not what they used to be.

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