The UK government is raising national insurance contributions (NIC) by 1.25 percentage points.
The move could raise £12bn for the government, and will be used to plug gaps in health and social care funding.
The hike goes against promises made by the Conservative party not to raise national insurance contributions, VAT or income tax in this parliament. It also has a direct impact on the vast majority of workers' take home pay.
"Everyone will be going home with a little bit less," Tom Selby, a senior analyst at AJ Bell, told Yahoo Finance UK.
Here's what it could mean for you:
What is national insurance?
National insurance is a form of social security tax introduced in 1911 to help fund the welfare state. The tax is levied on income and taken out of people's pay packets by employers before it hits workers' pockets.
Paying National Insurance allows Brits to qualify for certain benefits and the state pension. NICs is a major source of revenue for the Treasury, bringing in more than £150bn in 2021/22 and accounting for one in five pounds raised in taxation.
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Rates of National Insurance range from 5.88% for those on the lowest income to 9.7% for top earners. The government is said to be considering increasing that banding to 6.78% and 10.51%.
Who pays it?
Almost everyone who works in the UK must pay mandatory National Insurance. Workers qualify if they are aged between 16 and 67 and are either an employee earning above £184 a week or self-employed and making a profit of £6,515 or more a year.
What would an increase mean for take home pay?
According to analysts at Hargreaves Lansdown, in practical terms, for someone earning £20,000 a year, they’ll pay £1,382 NI a year - up £130 from their current annual NI bill.
Someone earning £30,000 a year will pay £2,707, up £255 and someone earning £50,000 a year £5,357 up £505.
What can you do about it?
The increase in dividend tax means people investing outside tax sheltered wrappers like pensions and ISAs should review their portfolios to make sure they are making as much used as possible of their annual contribution allowances to keep their tax bills as low as possible.
“Assuming the new Health and Social Care Levy operates in a similar way to National Insurance, pensions salary sacrifice should become more attractive as a result of this announcement," said Tom Selby, head of retirement policy at AJ Bell.
“Savers will be incentivised to boost salary sacrifice contributions in order to reduce their overall tax bill, while also boosting their retirement pot and benefitting from tax-free investment growth in the process."
What do experts think?
Business leaders have called it a "jobs tax" and experts have warned it could raise issues of intergenerational unfairness.
Over 67 who stand to benefit from social care do not pay National Insurance even if they are still in work, but older people will be the ones that will need social care soonest.
"It is in the interest of all generations to reach an equitable solution, but raising National Insurance contributions fails to meet that mark and breaks the contract between generations," said James Kirkup, director of the Social Market Foundation.
"A NI increase passes the buck to poorer, working families who have suffered significant financial hardship during the pandemic, whilst protecting the wealth of asset-rich older voters."
Read more: UK businesses warn NI hike will hit hiring
Coles suggested introducing NIC for over-67s to help even the disparity. If it’s paid at the same rate as for working people, this would mean older people paying another £500m in tax.
Business groups have also spoken out against the proposals. Mike Cherry, national chairman of the Federation of Small Businesses (FSB), called it a "jobs tax" and said now was not the right time for tax hikes given many companies are still reeling from the pandemic.
"It is astonishing that just 24 hours after many businesses were able to re-open, ministers think now is a good time to land small firms with this bombshell," Cherry said.
"Jobs don’t create themselves. The more that the Government chooses to put up the costs of employment, the fewer jobs there’ll be for young workers who have been hit so hard by the pandemic."