A new kind of tax

Britain's tax system is changing dramatically as a result of last week's Budget. Millions of people in the middle-to-upper income brackets will pay hundreds of pounds more through the increase in national insurance payments - and there is virtually no place to hide.

Earnings above £34,515 will in effect be taxed at 41% from next April, even though income tax at this level is 40%. A series of crackdowns on national insurance avoidance have ensured there are few legitimate ways to avoid paying.

The NI increases will, for many families, wipe out the benefit of the tax credits announced last week. The government believes people are willing to pay more tax to fund improvements to the NHS. Opinion polls and anecdotal soundings, such as those expressed by taxpayers on these pages, suggest it is right.

But tax specialists believe taxpayers' patience will be tested if there are further increases. John Whiting, of PricewaterhouseCoopers, who is also president of the Chartered Institute of Taxation, said: 'It may not seem much, 1%, but that could go to 2%, 3% or 4%.'

Mike Warburton of accountant Grant Thornton added: 'I don't think this is national insurance. It is a new kind of tax.'

In the past, employers have used a series of often bizarre schemes to cut their NI bills, making payments in gold bullion, fine wine, platinum sponges and even arsenic. But these loopholes have been closed, and now one of the few ways to avoid NI is through contributions to company pensions. Employers do not pay NI on pension contributions, nor do the self-employed. Tax experts believe employers may choose to boost their workers' pension savings rather than pay higher salaries.

Danny Cox of financial adviser Hargreaves Lansdown explained: 'If an employer is paying into a company pension scheme, the contributions will avoid NI costs because contributions are from gross pay. Salary payments will attract an additional 1% NI from the employer, plus an additional amount from the employee.

The fact that employer pension contribution do not attract NI may influence some employers to pay into a stakeholder pension when they may not otherwise have done. Where cost is an issue, the saving of NI payments could be the deciding factor.'

Accountants believe some companies will consider paying employees in shares, through employee share trusts, to cut their NI bills. Employers can also have the payment treated as a business expense, which will qualify it for tax relief.

However, these advantages do not apply to employed people paying into their own pensions.

Directors of owner-run companies may also be able to cut their increasing NI bills. 'The main way people get around NI,' says Cox, 'is when they are shareholders in their own company or a company that employs them. They take dividends instead of salary: a typical director will take salary of £25,000, and £50,000 in dividends - that saves them the employer and the employee NI.'

There are some perks on which employees do not pay NI, including private medical cover, gym membership and childcare. Only on childcare do workers and employers avoid NI. Inez Anderson, of accountant KPMG, said employers might increase provision of these services instead of paying higher salaries.

Another crucial aspect of the chancellor's tax-raising package was the freezing next year of personal tax allowances and bands for all but the elderly. Accountants estimate that freezing both allowances and the threshold for higher-rate tax will bring an extra 180,000 people into the higher-rate tax band for the first time next April. Higher-rate tax will apply to people on gross incomes of around £34,515.

For this group, higher bills may be offset partly by the ability to receive tax relief at 40% on pension contributions. Higher-rate tax payers can also claim the difference between basic and higher-rate tax (18%) on charitable donations through the government's gift aid scheme.

But there is higher tax to pay on bank and building society interest and dividends held outside individual savings accounts. Those moving into the higher-rate tax band should make sure they save as much as possible through pensions and individual savings accounts.

With higher tax bills on the way to fund the NHS, some of the 2.1m people paying for private medical insurance may begin to question whether this is good value. Premiums have been rising at more than 20% a year for some policyholders and health analyst Laing & Buisson estimates the average cost of private cover is now around £1,000 a year.

Graeme Warner of health insurance adviser Manson Warner say the Budget 'won't change a thing' for people using the private sector because it will be years before improvements in the NHS are visible.

What do you think?

'I'll willlingly pay more NI - so long as we see results'

Single parent Stephen Kirkham will receive a £545 a year child tax credit for his two children, Rebecca and Thomas. But because he earns £35,000 as a salesman for his family's printing business in Tonbridge, Kent, he will also suffer a £399 rise in national insurance contributions.

'I don't mind paying more NI so long as we see results,' he says. 'My Nan and Mum have both been poorly lately, so I've spent some time at the local hospital, which needs a lot of work. It seemed understaffed and everybody was stressed. The building is old and needs updating.'

He smokes three or four cigarettes a day, so will feel little impact from the 6p rise on a packet of 20; he is pleased that duty on alcohol has been frozen.

However, although Stephen belongs to a company pension scheme and has little other money to save at the moment, he would have liked to see some encouragement for savers.

'I save into a couple of Tunbridge Wells Friendly Society Baby Bonds for my children, and I think it's important that we save. So it would have been nice if the government had done something to encourage this.'

'I'm happy - the chancellor has done a wonderful job'

Self-employed businessman Brian Bowles is delighted at the prospect of paying more in national insurance contributions.

'I think the chancellor has done a wonderful job this time,' Bowles says from his home in Crewe. 'I have four grandchildren. The implications for them over the next 15 years are better.'

Bowles would have been happy to pay more in tax - to improve the justice system, education and the rest of the national infrastructure as well as health.

But he is glad Brown has made a start with the NHS, though Bowles is not convinced that money alone will bring about changes.

Even so, he is concerned that less glamorous issues are neglected: 'Locally, about 15% of people have numeracy problems and 13% literacy problems. How do those people go about accessing health services?'

So does he really not mind paying more? 'I'm happy. We've got to get away from thinking about what's in it for me. We've got to get to European levels of spending at least.'