National Insurance shake-up: How much more (or less) will you pay?
The National Insurance (NI) uplift was announced in the Spring Statement as part of a range of tax changes designed to help millions of workers who had been hit hard during the pandemic.
Former chancellor Rishi Sunak called the decision to raise the threshold under which earners pay no NI “a cut in tax, that will save the average worker £330 a year”.
As part of the £6bn package and the “biggest personal tax cute in over a decade”, the level at which people start paying NI has risen from £9,880 to £12,570, essentially aligning it with the income tax personal allowance.
The government said 30 million people across the UK will benefit, and for 2.2 million workers, they will be lifted out of paying any personal tax altogether.
While the government said 70% of workers will pay less NI, even after accounting for the Health and Social Care Levy, analysts said millions of workers will pay more in tax as of today.
In September 2021, the government announced it would up the rate of NI by 1.25 percentage points, from 12% to 13.25% effective from April 2022.
‘Far from a tax cut’
Laura Suter, head of personal finance at AJ Bell, said: “While it will be a welcome relief for many people to see the amount deducted for NI on their payslip fall, we’re all still paying more tax than when the chancellor started changing the system.
“In some ways it’s admirably audacious to announce a massive tax hike and then try to win plaudits for reducing the very tax rates you increased, but the end result is that much of the population will still be paying higher taxes.
“The Office for Budget Responsibility itself finds that for every £4 Sunak increased taxes by last year, he’s only giving back £1 in the updated plans – which is far from a tax cut.”
The higher levy is intended to bump up government spending on the NHS and social care, which has been under severe strain even before the pandemic hit.
In April those earning more than the upper earnings limit of £50,270 were charged at an increased rate of 3.25%, up from 2%.
From next year, the 1.25% added to NI will become the new Health and Social Care Levy.
Alice Haine, personal finance analyst at Bestinvest, said: “These increases coincide with the escalation in the cost-of-living crisis after Russia’s invasion of Ukraine sparked a surge in food, fuel and energy prices – delivering a double blow to the wallets of everyday Britons.”
Sarah Coles, personal finance analyst at Hargreaves Lansdown, added: “In the next tax year, we may be expecting a cut to basic rate income tax but despite this, by the time we’ve lived through four years of threshold freezes, in 2025/26 almost every worker will be paying more tax.”
Some respite for those under the worst financial pressure will come on 14 July, when eight million vulnerable households will receive the first of the cost-of-living cash payments of £326. This will be followed by a second instalment in the Autumn (£324), forming part of a £1,200 support package for those hardest hit by the cost-of-living crisis.
How much more will you pay?
AJ Bell’s analysis revealed that in the current tax year, anyone earning around £31,500 or less will be better off under the new system, “to varying degrees”.
Someone earning the new threshold of £12,570 will pay £234 less in NI this tax year than they would have under the previous system.
The move doesn’t benefit the lowest earners, as they wouldn’t have met the threshold for paying NI under the old system. For example, someone on £10,000 a year saves just £10 a year in NI under the new system.
Someone earning £35,000 will pay £47 more in tax this year, but those earning £45,000 will be hit with an extra £172 in NI in 2022/23.
A higher earner on £80,000 will be paying £609 in extra NI costs – more than £50 a month more, and someone on £100,000 is facing an extra £859 on their bill.
Over the longer-term, the figures look even more bleak for middle earners.
Suter said: “If we look over the next five years, including the current tax year, someone on a £25,000 salary who sees average annual wage increases over that period will pay an extra £88 in tax. But it’s the middle earners where the squeeze really happens, as someone on £50,000 will pay an extra £1,821 in tax over that time thanks to Sunak’s changes.”
Higher earners come out better off, with someone on £80,000 paying £23 less tax over the five-year period.
“The higher earner anomaly is because under the new system the upper limit for NI, where the lower 3.25% rate kicks in, will be frozen at £50,270 for the next four years, which means that as someone’s salary increases more of it is subject to lower rate of 3.25% NI. This compares to the current system where both the upper and lower thresholds rise with inflation,” she explained.
What can you do to minimise the impact?
Bestinvest’s Haine suggested taking advantage of schemes such as salary sacrifice to boost take home pay further.
“Some employers allow staff to contribute a greater proportion of their salary into their workplace pension in lieu of pay,” she explained.
“While pension contributions already benefit from income tax relief, the system also offers NI relief which benefits both the employee and employer.”
But she warned: “Only consider this route if you are confident you can pay all of your household bills adequately and won’t be affected by having less income every month, even if the money is being redirected towards your future. Also note, that a lower salary could also affect the amount you can borrow when it comes to a mortgage application.”
Take a fresh look at your state pension
To qualify for a state pension you need 10 qualifying years on your NI record.
This means you were either working and paid NI, you received NI credits if you were unemployed, ill or a parent or carer, or that you have paid voluntary NI contributions.
“With the state pension age for women and men currently 66 and set to rise to 67 between 2026 and 2028, many working Britons will automatically achieve that in 10 years,” Haine said.
“However, to hit the full state pension allowance of £185.15 per week or around £9,630 a year for those reaching state pension age after April 2016, you need to achieve 35 qualifying years.”
This can be harder to achieve for parents who took time out of work to care for children or elderly relations.
It can also be a challenge for those who enjoyed a long career break or were self-employed – and therefore did not pay NI – or those who spent a large portion of their career working overseas and did not make voluntary contributions.
If you are close to the state pension age and fear you do not have enough qualifying years to receive the full amount, you can obtain a state pension forecast from the government. See YourMoney.com’s National Insurance gaps: How to pick the best years to boost your pension for more information.
“Checking your record will clarify whether you should top-up and whether you might qualify for NI credits – such as carer’s credit for example – for some of the missed years”, she added.