Changes to national insurance contributions (NICs) will take effect this summer.
Thresholds will rise and all employees will see a reduction in their NICs in their July payroll.
Here, head of taxation at Beatons, Andrew Diver, gives an overview of what’s set to change.
From July onwards the threshold at which NICs are payable will rise from an annual amount of £9,880 to £11,908.
The amount of NICs payable temporarily increased by 1.25% in April 2022 to assist the government with the costs of coronavirus and social care.
However, due to the cost-of-living crisis, Chancellor Rishi Sunak was under pressure to reverse this increase.
Instead, he extended the amount a person can earn before national insurance is due, to help balance some of the pressure on earners.
Who will save money?
Employees on lower salaries will benefit the most as the effect of the threshold being increase will outweigh the extra 1.25% increase. The maximum saving will be £360 which will be noticed by those earning £12,570 a year.
Those earning the UK average salary of £31,285 will pay £185 less national insurance (around £15 per month).
When earnings hit £51,000 the effect of the 1.25% outweighs the increase in the threshold so no change will be noticed as the combination of the two measures will effectively see these earners ‘break even’.
Who will pay more?
Earners in receipt of a salary of more than £51,000 will pay more NICs than in 2021/22 with those being paid £100,000 paying an extra £459.
Directors who are remunerated through a mix of dividends and salaries are likely to increase their salary element to £11,908 for the year to April 5, 2023, to take advantage of the increased threshold.
At the lowest end a 2.9% increase in take-home pay will be seen for those earning £12,570. This is a little help during difficult times but with inflation closer to 11% the government may be required to continue to offer other financial support measures.
How does this affect the self-employed?
The changes will affect the self-employed, with thresholds also increasing for Class 4 National Insurance and ‘the lower earnings limit’ - a whole new concept for Class 2 contributions. This has peculiar impacts in connection with adding qualifying years for state pension purposes.
The threshold at which Class 4 NICs are payable will increase in July from £9,880 to profits over £11,908.
However, Class 2 contributions count in terms of accruing qualifying years for state pension purposes, so care is required.
Before the increase in thresholds Class 2 National Insurance was payable at £3.15 per week where annual self-employed earnings exceeded £6,725.
Now no contributions are required until your earnings exceed £11,908.
What are the new rules regarding qualifying pension years?
- Income over £11,908: Pay Class 2 NICs at £3.15 per week and receive a qualifying year for state pension purposes.
- Income under £6,275: Don’t pay Class 2 NICs. No qualifying year (although you can voluntarily pay Class 2 when income is under £6,275)
- Income between £6,275 and £11,908: Don’t pay Class 2 NICs but are deemed to have a qualifying year for state pension purposes.
This means there is an advantage in NICs terms, to earn between £6,725 and £11,908 to obtain a qualifying year for state pension purposes without having to pay for it.
Beaton’s can advise on any of the information here and provide specific advice on your particular situation. An estimation of how the changes will affect you, can be found on the government website here:
Contact Beatons on info@beatons.co.uk or call 01473 659777