Insurance

What Rishi Sunak’s National Insurance Threshold Increase Will Mean For You

Spring Statement: Sunak says 70% of workers will get an effective £6billion tax cut to raise the NI threshold by £3,000. Photo: PA

Workers will keep an extra £3,000 before paying National Insurance, as Chancellor Rishi Sunak announced in his spring statement that the threshold would rise to help families with the cost of living.

Sunak said the threshold at which employees repay National Insurance will be raised by £3,000 to £12,570 a year in what the Chancellor has called a £6billion personal tax cut for 30million people in across the UK.

“Our current plan is to raise the NIC threshold this year by £300. I’m not going to do that. I’m going to raise it by the full £3,000. income tax.

“And not gradually over many years, but all at once, this year. From this July people will be able to earn £12,570 a year without paying a penny of income tax or insurance national,” he said in his spring statement.

The Institute for Fiscal Studies had said the move would compensate 70% of workers who will be affected by the 1.25 percentage point hike in National Insurance contributions, which comes into effect next month.

The Treasury said that of those benefiting from the increased threshold, 2.2 million people will be taken out of the National Insurance payment.

The National Insurance change will align the threshold to start paying the levy with that for income tax, at £12,570.

What is that

National Insurance (NIC) contributions are compulsory for anyone over the age of 16, who earns more than £184 a week, or is self-employed and makes a profit of more than £6,515 a year.

However, the rates vary depending on the salary and employment status of the workers and are divided into different categories of payment.

Employees pay “class 1” contributions, while the self-employed pay slightly lower rates of “class 2” or “class 4” contributions, depending on their income.

“Class 3” are voluntary contribution designed for those who have gaps in their national insurance payments due to periods of unemployment or working abroad and who have to pay more to qualify for the full state pension.

How much will I pay?

Workers earning between £9,568 and £52,270 currently pay 12% for NICs. The rate will rise to 13.25%, but in July the income threshold will be £12,570 to £52,270.

Income over £52,270 will be taxed at 3.25% from April, up from 2% previously.

How much are you going to pay?  Tble: Quilter (assumes a primary threshold of £9,880 for April, May and June 2022 and £12,570 thereafter)

How much are you going to pay? Tble: Quilter (assumes main threshold of £9,880 for April, May and June 2022 and £12,570 thereafter)

“This means that the benefit to NIC payers will diminish over time as wage inflation pushes people to pay more, and is reflected in the government’s estimate that the cost to the Treasury will rise from 6, £2bn in 2022/23 to £4.3bn in 2025/26 r National Insurance bill.

“This of course means that the National Insurance primary threshold is linked to the Personal Allowance, which the Chancellor has already set until at least 2025/26, so these tranches will remain static for some time to come. The government has announced that the primary threshold and the lower profit limit will only increase in line with the CPI from tax year 2026/27.

“This means that the benefit to NIC payers will diminish over time as wage inflation pushes people to pay more, and is reflected in the government’s estimate that the cost to the Treasury will rise from 6, £2bn in 2022/23 to £4.3bn in 2025/26.”

National Insurance covers benefits such as State Pension, Additional State Pension, New State Pension and Contribution-Based Unemployment Benefit.

Ben Pollard, Founder and CEO of Cushon, said: “Raising the national insurance threshold will at least provide some much-needed respite during the cost of living crisis, particularly for the lowest paid.

“Prior to the announcement, many households across the country were nervously checking their finances and looking to cut spending or savings – which could have a disastrous impact on their future financial security. However, with the latest spike in inflation, every penny counts is more important than ever.

Watch: How does inflation affect interest rates?