Rishi Sunak had a few difficult decisions to make prior to his Spring Statement on 23 March. Knowing that households are going to be increasingly squeezed by rising costs of energy, fuel, food, in fact almost anything that we buy due to rising inflation, and with the realisation that he had already announced an increase in National Insurance Contributions with effect from 6 April 2022, he must have had a few sleepless nights trying to figure out what he could do to help businesses and families. Read on to understand the changes to National Insurance.
One of the bigger changes announced in the Spring Statement was on National Insurance thresholds. Maybe not the most exciting of areas, but an important one to understand. This is a bit of a technical blog, but bear with us!
The Social Care Levy is still going ahead
From April 2022 we are all having to pay higher National Insurance Contributions (NIC). The rate went up for:
- Self employed
- And on dividend tax!
This has been done as an increase in National Insurance for 2022/23, but will be split out separately as a new tax from 2023/24 onwards. The increase is 1.25% – so for example employees primary Class 1 NIC has increased from 12% to 13.25%.
The Spring Statement announcement will help
So what was announced in the Spring Statement? Will this reduce how much National Insurance you have to pay? In a nutshell some of the income thresholds where National Insurance kicks in are going up, so you won’t have to pay NICs on as much of your income. The change kicks in part way through the new tax year, which means this is actually quite a complicated change.
Employers’ Class 1 National Insurance
The secondary Class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement. The rate increased from 13.8% to 15.05% on 6 April 2022. This kicks in at the secondary threshold of £758 per month.
Employees’ Class 1 National Insurance
The rates of primary Class 1 NIC deducted from employees’ salaries increased on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.
- The lower earnings limit (LEL) and the upper earning limit (UEL) for 2022/23 remain the same as proposed earlier in the year.
- On earnings between the LEL (£6,396 pa) and the primary threshold (being £9,880 pa until 6 July 2022) the employee pays Class 1 NIC at 0% and will receive NIC credit for those wages.
- On earnings above the UEL (£50,270 pa) the employee pays Class 1 NIC at 3.25% for 2022/23.
However, Rishi has made things more interesting (!) by announcing that the primary threshold (PT) for Class 1 NIC will change part way through the tax year on 6 July 2022. The PT is being increased to relieve the NIC burden for those on lower incomes.
What does raising the primary threshold actually mean?
Raising the primary threshold means that employees won’t have to pay as much National Insurance. Over a full year this means a saving of £356. Compared to the rising cost of living this is a drop in the ocean, but in the immortal words of Tesco “every little helps.”
As NIC is paid according to the pay period only 9 months of earnings (from July 2022 to March 2023) will benefit from the higher PT. It is a welcome change though and makes life a bit easier aligning the PT with the personal allowance of £12,570 meaning that no tax or NIC is paid on any earnings under £12,570 from 6 July 2022 until 5 April 2023.
How does it work if you are a company director?
The change in the primary threshold is only taking place part way through the tax year. If you are a company director then your NICs are likely to be worked out on a cumulative basis instead of just being done on a month by month basis. The primary threshold for directors is therefore £11,908 for the whole tax year, instead of increasing part way through the year.
Yes that made our heads hurt too.
Self employed NIC
Rishi also aimed to help those who are self-employed by reducing Class 2 NICs to zero for the self-employed with profits between the small profits threshold (£6,725 for 2022/23) and the lower profits limit (£11,908 for 2022/23) from 6 April 2022. Class 2 NICs are paid at a flat rate of £3.15 per week for 2022/23. No change was announced for Class 4 NICs.
There was also some help in the Spring Statement for small employers. An increase in the employment allowance (which allows employers to reduce their NIC payments up to a certain amount) was announced. This takes the allowance from £4,000 to £5,000 from April 2022. We have a blog explaining what the employment allowance is and how you can find out if you are eligible.
What else was announced in the Spring Statement?
There were a couple of other announcements in the Spring Statement that will help:
- Fuel prices. A temporary cut in fuel duty of 5p per litre for a year to help with the ever-increasing cost of fuel. To put this into perspective, this is only the second time that fuel duty has been cut in 20 years!
- Eventual reduction in basic rate tax by the end of the parliament from 20% to 19%. Although we will have to wait a while until we feel the benefit of this announcement, April 2024 to be precise, this means we will all save a bit on our income tax bills.
Are we any better off?
According to Rishi his Spring Statement is “intended to support the British people in dealing with rising costs of living”. However, with the Office for Budget Responsibility (OBR) predicting that inflation will average a massive 7.4% this year, such steep price rises will outpace growth in wages, meaning that we will still feel the pinch. We will have to wait for the Autumn Budget to see if there will be further tax changes.