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Confused accountant

Here’s why your NI contributions are going up by much more than 1.25%

Confused accountant

Here’s why your NI contributions are going up by much more than 1.25%

In news that will affect businesses, employees and self-employed people over the coming years, the government announced last Wednesday that it will be increasing National Insurance (NI) contributions as of the beginning of the 2022/23 financial year, but do people really understand what this means to them?

The tax rise will become a levy of its own – the Health and Social Care Levy – as of April 2023, but it will initially be introduced as an increase to NI contributions. A look through Google News on Wednesday afternoon confirmed that this was widely reported as a 1.25% increase.

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With the exception of BBC News, which has clarified that it’s the future health and social care tax that equates to 1.25%, all of these sources are WRONG – including the usually excellent Money Saving Expert. Our NI contributions are actually not increasing by 1.25%, but by over 10%.

Why is this?

As this article explains, NI contributions are about to increase from 12% to 13.25%, so that surely is an increase of 1.25%, isn’t it?

Well, no. What we can say is that contributions are increasing by “1.25 percentage points” (as the BBC does here), as that simply acknowledges a numerical change in the percentage, but it’s a fairly meaningless detail. To accurately work out the rate of NI contribution increase, we need to work out a percentage of a percentage, which is a little more complicated than basic addition.

A simple example

To illustrate this problem, lets image that we have £100 in cash on a table. That figure means that we can take any portion out of the £100 and easily work out what percentage we’ve taken. So we can agree that:

• if we take £12, that’s 12% of the £100
• if we take £1.25, that’s 1.25% of the £100
• if we take £13.25, that’s 13.25% of the £100

The misapplication of percentages, however, comes if we take £12 initially, then come back later and take another £1.25, and assume that we have only increased the amount we’ve taken by 1.25%. This is because the £1.25 is 1.25% of the original £100 total, and not of the £12 we have already taken.

So to work out the percentage increase in the money we’ve pocketed, we need to work out what £1.25 is as a percentage of the £12 we took earlier. That comes out at 10.4166% – more than eight times higher than 1.25%. In fact, adding 1.5% to £12 would be an increase of just 15p!

Applying this to the NI hike

The NI hike (which incidentally breaks a pledge in the Conservative Party’s election manifesto, but that’s another rant for another time) is analysed by a separate article on the BBC website. As the bar chart shows us, someone on an annual salary of £20,000 currently pays £1,251 a year in NI, and this will go up by another £130 in 2022/23. That is a rise of 10.3916%, not 1.25%.

This shows that many reputable sources are, perhaps unwittingly, downplaying the scale of the NI hike by providing inaccurate figures. A more accurate headline would be any of the following:

• NI contributions to jump by 10.4% in 2022
• Britons’ NI contributions to increase by over a tenth/nearly a ninth
• You will pay 110.4% of your current NI contributions next tax year

Can you imagine the reaction if the last one of these was popularised? It’s perfectly accurate – it just chooses to use big-looking numbers to make its point.

Why does this matter?

We are presented with facts and figures every day, and sometimes there’s more to them than meets the eye. They can easily be at best manipulated, at worst misreported.

From an internet marketing point of view, this can be applied to your web traffic and conversion rates. Are you working out percentages of percentages correctly? Is your site performing better than your figures suggest at first, or are you misguidedly sitting on your laurels? Take the time to do the maths, as sometimes the figures really don’t make a lot of sense without it.

John Murray

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