The Government is reportedly planning to hike National Insurance by 1% to pay for social care, in a move that could leave workers hundreds of pounds a year worse off.

The increase would result in workers having to pay more in tax, meaning they would have less disposable income to spend each month. It has been reported that the plan could raise more than £10bn in additional tax revenue to help the Government pay for the rising care costs of the UK’s ageing population.

While the policy is likely to be unpopular, experts say it would result in fewer people having to sell their homes to pay for care in old age. However, critics argue a hike to National Insurance is the least fair way of solving the problem, as it would hit lower earners hardest.

Also, as retirees do not pay NI, it would also mean the burden of funding social care would fall entirely on workers, which again would likely be very unpopular.

Here we explain what the proposal would mean for your finances.

How does National Insurance work at present?

NI raises around £150bn a year for the Treasury’s coffers, making it the second biggest earner after income tax.

It is used mainly to pay for state benefits, such as the state pension, statutory sick pay, maternity leave and unemployment and disability benefits.

Workers do not pay NI until they earn £9,568. You then pay 12% of your earnings between £9,568 and £50,270, and 2% for anything you earn over this amount. The self-employed pay lower amounts of NI.

However, if the Government presses ahead with its plans, those rates would rise from 12% to 13% and from 2% to 3% respectively.

How would it affect me?

How much you pay in NI is linked to how much you earn, meaning the higher your salary the bigger your contribution. Figures calculated by accountants Blick Rothenberg for The Sun reveal that someone earning £15,000 a year would see their NI contributions rise by £54 a year to £706.

Someone on £25,000 – slightly under the median national salary of £29,900 – would see their NI bill rise £154 to £2,006.

If you earn £50,000 a year, your NI bill would rise by a whopping £404 to £5,256, while someone earning £75,000 a year would see theirs jump by £654 to £6,033.

How likely is it that the hike will happen?

While the Conservatives ruled out increases to income tax and NI in their 2019 election manifesto, these are exceptional times.

Chancellor Rishi Sunak has publicly stated the need to balance the books and to find a way to pay off the enormous amount of debt that the Government has taken on since the start of the current crisis.

So, while the move might be unpopular, the Government could argue it is necessary to get the public finances back on an even keel.

Having that said, there’s a possibility the Chancellor may well tweak his plan to introduce a blanket NI increase, especially if there is a backlash among Conservative MPs and workers.

If you’d like to discuss the topics mentioned in this article further, don’t hesitate to get in touch with your adviser.