The Rising Cost of Living: Surging Energy Prices and National Insurance Contributions

The average British household will see energy bills and NI contributions increase as the economic repercussions of COVID-19 start to take its toll.
cyzgOcmn_400x400.jpg
6 min read
Field

The cost of living post-pandemic is set to get much higher, as Boris Johnson announced increased National Insurance contributions last week and prices of electricity and gas are set to soar as energy companies go into liquidation.

Why are National Insurance contributions rising and by how much?

National Insurance was introduced in 1911. It is a tax that is paid by those employed, employers or the self-employed (calculated by their profits) in order to fund the NHS, state welfare and pensions. The tax spans the whole of the UK, although there are some discrepancies within the devolved regions on how they apply the tax.

On the 8th of September, the UK Government announced that an extra tax will be introduced in order to better fund social care within England. The ‘Health and Social Care’ tax will see National Insurance (NI) contributions increase by 1.25p in for the pound, i.e. 1.25%. The tax will be effective from April 2022.

Afterwards, the rate of National Insurance contributions will then decrease to the rate it is at now, as the tax converts into a new levy from April 2023. Those who are working and are claiming state pension will also be subject to this levy.

To put this National insurance increase into perspective, a person with an average salary of £20,000 per annum currently pays around £1,231 per year in National Insurance. From April next year, the same person will pay £1,381 per year – an increase of £130 per year. Those on a salary of £100,000 currently pays £5,878 in National Insurance, and will see their contributions increase to £7,008 (+£1,130). Those who earn less than £9,574 per year (£797 per month) do not have to make National Insurance contributions and therefore do not have to pay this tax/levy.

Many have been critical of the contributions increase, including those within the Conservative Party, arguing that the tax will impact younger workers and those on low-paid jobs the most. This is because the rate of National Insurance contributions is fixed no matter what income the person is earning, whereas other taxes such as income tax have brackets which increase the rate a worker pays based on their income. Therefore, as your income rises, National Insurance contributions become disproportionate compared to your income – workers earning below approximately £50,000 pay 12% rate in National Insurance contributions, but those earning in excess of £50,000 pay just 2%.

However, the Prime Minister Boris Johnson insisted that the tax is necessary due to the economic and financial burden COVID-19 has placed on the NHS and social care services across the country. The Government expects the tax to raise around £12bn every year – with a large amount going straight to the NHS and then the remaining amount being drip-fed into the social care system over the next three years.

There are some slight differences to how this tax will affect Scotland, Wales and Northern Ireland and how the capital raised from the tax will be distributed.

Energy Prices have been surging recently, making multiple firms bust

But thats not all the ordinary, hard-working homeowner has to worry about. Recently, energy prices have been soaring and customers are going to have to pay the price, as many firms have already gone bust.

Gas prices have gone up about 250% this year, up 70% in August alone. This is due to the fact that there has been a high worldwide demand for gas last year, due to the harsh cold winters around Europe. Furthermore, Asia in particular has seen a heightened demand for liquefied gas, due to extreme weather conditions.

There have been other contributing factors to why gas prices in the UK have been increasing exponentially, including the fact that power extracted from renewable energy sources have been low (as this summer has seen not much wind to power turbines). In addition, a fire outbreak at a National Grid site in Kent burnt a cable that was getting electricity from France.

As a result, many energy firms within the UK have gone bust, including Avro Energy, Green Energy and Bulb, who are currently seeking financial support. If your energy supplier collapses, your electricity and gas supply will not be cut off, although this may still see your energy expenses arise. This is because you will be switched automatically to a new tariff by energy regulator Ofgem, but this may mean you are with a new supplier on a more expensive tariff.

With many firms going bust, the UK Government have refused to bail out energy firms who are on the brink of insolvency or collapse.

The Business Secretary, Kwasi Kwarteng, said to Parliament:

“There is absolutely no question of the lights going out, or people being unable to heat their homes. There’ll be no three-day working weeks, or a throw-back to the 1970s. Such thinking is alarmist, unhelpful and completely misguided.”

“The government will not be bailing out failed companies. There will be no rewards for failure or mismanagement. The taxpayer should not be expected to prop-up companies who have poor business models and are not resilient to fluctuations in price.”

Kwarteng also stressed that the energy price cap will also remain. The energy cap came into force in January 2019 and sets out the maximum price an energy firm can charge in standard tariffs. However, from October, more than 15m households in England could see a 12% rise in their energy bills when the energy cap is increased. The energy cap adjustment in October will still see many energy companies selling power for ‘less than cost price’ (i.e. they make a loss for every sale), meaning many more energy firms are expected to collapse. Therefore, it is sensible to anticipate a large energy cap increase when it will be adjusted in April 2022.

Kwarteng also ensured that competition will remain within the energy sector, despite many firms going bust. He was confident that the energy sector will not return to a ‘cosy oligopoly’ where a handful of terms can dictate consumer choice and increase their tariff prices.

The increased energy prices mean that those that are on standard variable rate tariffs could see their energy bills rise incredibly high, since they their supplies do not need to adhere to the energy price cap. However, those on standard rate tariffs should only see a small increase from October when the cap is adjusted. Customers who were with an energy firm who have now gone bust also do not need to panic – they will be switched suppliers by Ofgem, although they may see their energy bills rise too if placed on a higher tariff by an alternate provider.

The increased contributions to National Insurance and rising energy bills is evidence that the UK and the rest of the world are starting to feel the full weight of the economic implications of COVID-19. With the continued rollout of vaccinations and restrictions slowly but surely being eased, the road to a real economic recovery is going to be a long one.

Written By

Security Cameras

Why use a VPN

Cloudflare Inc. Earnings Report (Q3 2021)

Cables