What does the NI threshold increase mean for employees and the self-employed?

What does the NI threshold increase mean for employees and the self-employed?

22/Jun/2022

Along with the start of the 2022/2023 tax year, 6 April brought a new increase to National Insurance contributions (NICs) known as the Health and Social Care Levy.

Despite anticipation that the Chancellor would postpone this uplift to help alleviate the financial pressures brought on by post-pandemic inflation and the cost-of-living crisis, the 1.25% increase to help support the NHS and social care across the UK took effect at the start of the financial year.

Whilst the NICs rise wasn’t delayed, in his Spring Statement 2022 the Chancellor did announce tax cuts on income to help families manage rising costs. Perhaps the most significant being a rise in the National Insurance threshold - meaning employees and the self-employed pay less National Insurance contributions on their income or profits for the 2022/23 tax year.

 

 

Employees undoubtedly felt the sting of paying more in NICs earlier this year, the good news is that this will be balanced out when the threshold adjustments begin on 6 July 2022.

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You can also make voluntary contributions if your self-employed profits or employed earnings are below their set thresholds.

 

How much in National Insurance contributions do employees pay?

Following the 1.25 percentage points increase in April, employees now pay a National Insurance contribution rate of 13.25% on earnings within the primary threshold of £190 per week. As announced by the Chancellor, the primary threshold will rise to £242 per week from 6 July 2022.

Individuals will be able to earn £12,570 annually without paying income tax or National Insurance. This means even if you earn above the increased threshold, you will benefit from paying less National Insurance starting in July - with the exception of higher earners making £50,000 or above who will be paying more National Insurance than the 2021/22 tax year.

The increase to the NI threshold is projected to save employees over £300 a year.

 

2022/23 Employee Class 1 National Insurance Thresholds

Lower Earnings Limit

£123 per week
£533 per month
£6,396 per year

Primary Threshold

6 April 2022 to 5 July 2022:

£190 per week
£823 per month
£9,880 per year

6 July 2022 to 5 April 2023:

£242 per week
£1,048 per month
£12,570 per year

Upper Earnings Limit

£967 per week
£4,189 per month
£50,270 per year

 

Employers are also expected to pay the 1.25% NICs rate increase meaning they contribute 15.05% on earnings; however, this is in relation to the secondary threshold which is set at £175 per week for the 2022/23 tax year.

 

2022/23 Employer Class 1 National Insurance Thresholds

Secondary Threshold

£175 per week
£758 per month
£9,100 per year

Upper Secondary Threshold

£967 per week
£4,189 per month
£50,270 per year

 

 

How will NICs change for the self-employed?

Prior to the Spring Statement, most self-employed individuals were facing increased National Insurance contribution (NIC) bills this year. However, those with profits up to and just over £28,000 will now see a fall in the amount they pay compared to last year. What’s more, low earners can benefit from deemed contributions.

The National Insurance rate for the self-employed differs from employees and they also pay two types of NICs:

Class 2 NICs

Class 2 National Insurance contribution is a weekly flat rate that most individuals would pay as part of their self-assessment tax bill.

The threshold at which fixed-rate class 2 NICs become payable was due to increase from £6,515 to £6,725. However, this threshold has also now been set at £11,908, and will be aligned with the personal allowance for 2023/24.

The £6,725 threshold has not, however, been discarded. In a big change for class 2 NICs, self-employed people with profits between £6,725 and £11,908 for 2022/23 are deemed to have made contributions without actually having to pay them. They will therefore continue to build up their contribution record. This is particularly important for State pension purposes where 35 qualifying years are required to obtain the maximum.

Many self-employed will pay less NICs compared to last year, with low earners also benefiting from deemed contributions.

Class 4 NICs

Class 4 National Insurance contributions are based on your level of profits.

The introduction of the 1.25% health and social care levy from 6 April put up the rates of profit-related class 4 NICs to 10.25% and 3.25%. However, the rate increase has been mitigated by a substantial uplift to the starting threshold. It was going to be set at £9,880 but will now be £11,908 across the 2022/23 tax year. For 2023/24, the threshold will be fully aligned with the income tax personal allowance of £12,570.

Although the freezing of the upper threshold at £50,270 is pushing more people into higher rate income tax, it is actually beneficial for NIC purposes. Extra profits are subject to NICs at 3.25% instead of 10.25%.

 

How much will you pay?

Class Rate for 2022/23 Tax Year
Class 2

£3.15 a week

Class 4

10.25% on profits between £9,881 and £50,270

3.25% on profits over £50,270

 

How can DSA help?

For individuals planning for changes to rates and thresholds can seem impossible, but there are ways to set yourself up for future success and better manage the financial ebbs and flows. One of the best ways is to seek help and advice from a professional advisor.

Our team can help you decide your best plan of action such as budgeting, saving and making use of tax allowances.

Keeping up with payroll legislation can be difficult for busy employers, it may be time to start thinking about outsourcing your payroll function. Whether your team consists of 1 or 500, our dedicated and professional payroll bureau oversee payrolls for clients across all industries.

Get in touch with us today to discover how we can help unlock your full financial potential.

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