What the National Insurance tax increase could mean for your finances

For those who just see it listed on their pay slip, but are not sure what it is, National Insurance is a tax on our earnings. It’s paid by both employees and employers (the self-employed pay it on their profits) and it funds services including the NHS; maternity, sick and bereavement pay; and the state pension. Over the years, an aging population has put a strain on this pot of money, because more people are taking from it than contributing to it. Then, of course, along came Covid-19, compounding the problem.

The tax increase announced this week was possibly inevitable but has been accelerated because we need to take the strain off the NHS and also fund social care which has become a huge financial burden for many.

There are concerns, however, that the increase will have a higher impact on the lower-paid, or those living pay cheque to pay cheque. The tax will be progressive, meaning those who earn more will pay more, but it’s not entirely linear.

For example, people earning £30,000 will pay £255 more, people earning £50,000 will pay £505 more, people earning £80,000 will pay £808 more and people earning £100,000 will pay £1,130 more.

What can you do about it?

We can’t avoid the tax rise, so the best option is to be proactive with our finances. Prepare your budget – and your brain – today for a lower pay cheque next April when the increases come into effect.

Need some help tidying your finances?

Invest more for retirement

If you’re able to, consider investing more. The stress on benefits and the state pension will likely continue over time, so it’s on you to invest more of your own money to make sure you have a comfortable retirement. Investigate your workplace pension and any matched offers available.

Learn more: A millennial’s guide to retirement

6 funds to consider for your retirement fund

If you have time on your side and are looking for growth opportunities in your portfolio, you could consider the Scottish Mortgage Investment Trust. It focuses on finding tomorrow’s winners and has returned 1,013%* over the last 10 years, turning £1,000 into £11,135*. The Marlborough UK Micro Cap Growth fund is another option and invests in firms with disruptive technologies or companies who are leaders in niche markets.

You could also consider investing in the long-term trends that are shaping our world. The AXA Framlington Global Technology fund is a clear play in this space, with a manager who has specialised in technology stocks since 1998. A different approach could be Guinness Global Innovators. This fund looks to invest companies benefiting from innovations in technology, communication and globalisation.

For those investors wanting to make the most of reinvesting dividends, or those who are closer to retirement and are looking for a fund that generates an income, VT Momentum Diversified Income with a current yield of 4.85%**, or The City of London Investment Trust, which has raised its dividend in each of the past 54 years, are worth a look.

*Source: FE fundinfo, total returns in sterling, 8 Sept 2011 to 8 Sept 2021
**Source, FE fundinfo, 9 Sept 2021

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.