Income

Earnings rise for some as National Insurance threshold rises from Wednesday

People will start to feel the benefits of an income boost in their wages this month as they grapple with the rising cost of living (Nick Ansell/PA) (PA Archive)

Many people will start to see an increase in their salary this month as they grapple with the rising cost of living.

From Wednesday July 6, the threshold at which people pay National Insurance (NI) will increase.

The move follows a controversial NI increase of 1.25 percentage points in April, to help pay for health and social care, which came amid a series of other bill hikes, including including an increase in the energy price differential.

NI’s starting thresholds will drop from £9,880 to £12,570 from July 6.

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The UK government has previously said this will benefit nearly 30million workers, with a typical employee saving more than £330 in the year from July.

Seven in 10 workers (70%) who pay National Insurance (NIC) contributions will pay less, even after taking into account the health and social care tax, the government has previously said.

Of those who benefit from the increased threshold, 2.2 million people will be removed from paid network cards altogether, he added.

Alice Haine, personal finance analyst at investment platform Bestinvest, said a saving of £330 “won’t stretch far when you realize it equates to just £27.50 a month”.

She continued: “Yes, every penny counts in this cost of living crisis and for some that £27.50 could be the difference between dining out every night and sometimes going without.

“For others, however, this amount will barely make a dent in their budget as they struggle to pay household bills amid soaring inflation as food, fuel and oil prices soar. energy is becoming the norm.”

Ms Haine added: “All of this is taking place against a backdrop of falling real wages where runaway inflation is eroding any wage increases workers receive, so any savings will quickly be swallowed up.

“Dig into the NI numbers, and the savings in July on NI actually aren’t that big if you go back in time a bit.

“This is because the threshold at which NI comes into effect had already increased in April from £9,568 to £9,880, with the main rate for employees rising from 12% to 13.25%, as the government sought to strengthen the NHS and social care. by introducing a 1.25 percentage point tax on health care and social services.

“This means those on low to middle incomes, earning less than around £35,000 are the biggest winners this month, as they will see their NI bill reduced by more than the amount they pay via direct debit. 1.25 percentage points.”

She said high earners will always end up paying more overall.

Any savings will be welcome right now, but it will only be a drop in the ocean.

Sarah Coles, Hargreaves Lansdown

Commentators have also recently pointed out how frozen income tax thresholds are pushing more people to pay higher tax bills as wages rise.

Figures released by HM Revenue and Customs (HMRC) last week showed almost two million higher and additional rate taxpayers were created in the space of three years.

About 6.1 million taxpayers are expected to pay income tax rates at the top rate of 40% or the additional rate of 45% in 2022/23.

In 2019-20, the total number of higher rate and additional rate taxpayers combined was approaching 4.3 million.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Unfortunately over time the tax burden will increase.

“Tax thresholds frozen until 2026 mean that as wages gradually rise, the taxman (sips) more and more of your money.”

The end result is that a large part of the population will still pay higher taxes

Laura Suter, AJ Bell

Ms Coles added: ‘Any saving will be welcome at this time, but it will only be a drop in the bucket.

“Someone paying £10 or £20 less in tax every month won’t notice once they factor in the rising cost of everything from energy to food and fuel. “

Inflation is expected to exceed 10% in the coming months, putting additional pressure on households.

Laura Suter, head of personal finance at AJ Bell, said: “A large part of the population will always pay higher taxes.”

AJ Bell’s analysis suggests that in the current tax year people earning around £31,500 or less will be better off under the new system, to varying degrees, although the most low income may not have reached the NI payment threshold in all cases.

Myron Jobson, Senior Personal Finance Analyst, Interactive Investor, said: “Cuts to various non-taxable deductions and thresholds and runaway inflation are a toxic combination that negates the benefit of a higher NI threshold and erodes our tax packages. compensation in the years to come. .

“The effect of the freeze is now much more severe than initially feared, as inflation is expected to climb to 11% this year. This leaves less money in our back pockets and makes it harder to save and invest to build wealth.

Additional household support is also on the horizon.

More than eight million households will start to see cost of living payments hit their bank accounts on July 14.

From that date, a first installment of £326 will begin to be paid to low-income households on benefits, the Department for Work and Pensions (DWP) previously announced.

The second part of the £650 one-off payment will follow this autumn.

Pensioner households are also set to receive an extra £300 to help cover rising energy costs this winter, while people on disability benefits will receive an additional £150 payment in September.

From October, households will get £400 off their energy bills.