Ever since Chancellor Rishi Sunak's 2021 Autumn Budget was announced, many taxpayers have been dreading the new tax year beginning in April 2022 for a variety of reasons.
Rapidly increasing energy costs, interest rates, and cost of living crisis have been slowly draining the finances of many families, especially those who are lower-income earners throughout the UK. But one of the biggest worries has been the National Insurance hike.
On earnings up to £50,270, employees will now pay a 13.25% National Insurance rate instead of 12%, and 3.25% instead of 2% thereafter. Self-employed workers will see rates increase to 10.25% and 3.25%, up from 9% and 2%, respectively. Therefore, employers, employees, and self-employed workers will all pay an extra 1.25p for every pound.
Many believe the increase has come at the worst time possible and has just increased the cost of living further. Or has it? In the Spring Statement 2022, the Chancellor announced changes that mitigate damage to lower-income earners in the form of an increased National Insurance threshold. So let's explore how much the rise in National Insurance Contribution and higher threshold will really affect your wages.
The increased National Insurance between April and July will undoubtedly see you pay 1.25% more in contributions than last year. But, since the National Insurance threshold is increasing from £9,880 to £12,570 starting from July, you may even pay less National Insurance in the 2022/23 tax year than you did in 2021/22.
Over the next 12 months, those who are earning up to approximately £35,000 will pay a lower national insurance bill than they would have in 2021/22. They will also see higher take-home pay. If you are earning more than £35,000, you can expect to pay more National Insurance Contributions than the previous tax year and will thus see a decrease in your take-home pay. This will become increasingly evident the more you earn.
|Salary||NI Contributions in 2022/23 compared to 2021/22|
Why is the National Insurance increasing?
Ever since the pandemic hit the UK's shores, the National Health Service (NHS) has been under unprecedented strain. At the height of the pandemic, NHS workers were known to work 16-hour shifts due to staff shortages and the necessity of needing staff to be working at various locations.
Prior to the pandemic, Government spending on the NHS had all but stagnated, increasing by little over 1% over the previous decade. According to KingsFund, The NHS received a budget of £148.9 billion in 2019/20. However, due to the pandemic, this shot up to a staggering £191 billion and £190.3 billion in 2020/21 and 2021/22, respectively, to cover costs for vaccines, Test and Trace programmes, personal protective equipment, etc.
Now that we seem to be coming out of the pandemic and back to normality, the issues that have plagued the NHS are still prevalent. There are still staff shortages throughout the UK, equipment and buildings are aged and need revamping, and rising inflation rates aren't helping. In an effort to solve these issues, the UK government has issued a temporary Health and Social Care Levy for the current 2022/23 tax year.
A National Insurance Contributions increase of 1.25 percentage points will increase funding for the NHS and social care services by over £10 billion in the current tax year alone. However, there is legitimate worry that the National Insurance increase won't help the NHS much since soaring inflation rates will continue to diminish and shrink those funds down.
From the 2023/24 tax year onwards, National Insurance will return back to the previous year's levels. But, the extra 1.25p per pound will still be collected as part of the new separate Health and Social Care Levy. This levy will also be paid by those who are of state pension age but are still working.
Why is the National Insurance threshold increasing?
The 2021 Autumn Budget, which detailed plans for a National Insurance Contributions rise, was met with heavy criticism. Many people thought that the 1.25% increase would simply put the tax burden on the working population, a sentiment that was echoed by some of Rishi Sunak's own party members.
As such, there were countless requests – by the people, as well as parliament members – to call off the National Insurance increase. There was hope that a reversal would be seen in the Spring Statement 2022, but this didn't happen. Instead, the Chancellor announced an increase in the National Insurance threshold from £9,880 to £12,570 to take effect in July. This makes the National Insurance threshold the same as the Income Tax threshold.
This was announced in order to push back the amount employees and self-employed workers can earn before having to pay National Insurance. Therefore, it's an attempt to ease the burden of National Insurance Contributions from lower-income tax payers – one of the biggest criticisms of the initial 1.25% increase.
This means that instead of almost all workers seeing increased National Insurance payments, many will see a reduction; only those earning more than around £35,000 will see an increase in contributions.
What does National Insurance pay for?
While the latest rise in National Insurance payments has focused on providing a much-needed boost to NHS funding and social care, National Insurance payments actually find a wide range of social needs in the UK.
National Insurance funds things like the state pension and benefits such as job seekers allowance and maternity allowance.
Who pays National Insurance?
National Insurance is paid by everyone over the age of 16, which is the age you receive your National Insurance number, as long as they earn above a certain amount.
If you are an employee and earn less than £190 per week, then you don't pay National Insurance. If you earn over this threshold, then your National Insurance payments will be automatically deducted from your pay packet.
The self-employed are also expected to make National Insurance payments, provided they make a profit of at least £6,725 per year. This is Class 2 National Insurance. if you make a profit of £9,881 or more a year, then, you will pay Class 4 National Insurance. As you'll be responsible for making these payments yourself when you're self-employed, you will usually make these payments via the Self Assessment.
The National Insurance rates are going up and, naturally, some people are worried about how this will affect their take-home pay. Not everyone will end up having to pay more, and those earning less than £35,000 a year will even see a reduction in their National Insurance contributions over the next 12 months.
For those who face a reduction in their take-home pay, the Chancellor has stated that these changes are necessary in order to properly fund the UK's social care and health service. Whether people end up paying more or less National Insurance, it's likely we'll all experience a general tightening of our belts as the cost of living crisis starts to bite.