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Changes to National Insurance: Millions see their monthly pay rise as a threshold change

Around 30 million people will see their take-home pay rise each month when changes to National Insurance contributions come into effect from 6 July.

The income threshold for paying the tax will rise from £9,880 to £12,570, meaning a smaller proportion of people’s wages and 2 million people will be exempted from paying altogether.

For many, the change reverses the impact of the 1.25 per cent rise in national insurance introduced in April, which was the annual levy to fund social care in the UK.

Anyone earning less than £35,000 will go back to roughly the same level as before April.

For some taxpayers, the threshold change will reverse the NI increase they have faced since April as a result of the 1.25% tax increase.

However, this is not the case for higher earners and most will still be paying more NI contributions than in March.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Any tax cut now is welcome, especially one that eases the pain of those on lower incomes.

“They’ve faced the brunt of the rising cost of essentials because that’s the biggest part of their spending, so they need all the help they can get.

“But we are not talking about large sums of money. £330 spread over 12 months is £27.50 a month.

“This is a drop in the ocean compared to the rising costs. So while this will help ease the pain a little bit, those on lower incomes will still struggle to make ends meet.”

Why is the change happening now?

It’s been something of a rollercoaster ride for NI over the first half of the year.

In September last year, the Prime Minister announced a 1.25 per cent rise in national insurance to come into force in April as a levy to fund social care.

Then, in this year’s Spring Statement, the Chancellor unveiled plans to increase the threshold at which workers start paying NI contributions from £9,880 to £12,570, which is the level at which people start paying income tax.

HMRC said it would reduce benefits for around 30 million people across the country and exempt 2 million from any benefits.

Since the April rise, staff have been paying 13.25 per cent in contributions on anything between £9,880 and £50,000 and 3.25 per cent on anything above £50,000.

Figures from Hargreaves Lansdown show how those on lower incomes will see their monthly pay rises once the changes come into force

Figures from Hargreaves Lansdown show how those on lower incomes will see their monthly pay rises once the changes come into force

So if your gross annual income was £30,000, you would be paying £204.32 a month in National Insurance contributions this March.

After April’s rise, your payments would have increased to £222.16 a month, but from July 6 they will drop to £192.46. This equates to a 5.8% year-to-date drop.

At the same time, higher earners will pay more. Almost a third of working taxpayers will still pay more NI than they did before March.

For those on £40,000, the saving drops to £103 a year, while those on £50,000 will save just £10 compared to what they paid the previous year.

Coles said: “While we have been distracted by NI rises and cuts, the freeze in income tax thresholds has been more damaging. The Institute for Fiscal Studies estimates that by 2025/2026, the freeze will actually amount to 16.4 percent of the real threshold reduction.

By the time we get through four years of the threshold freeze, almost every worker will be paying more tax in 2025/26

“In the current tax year, if you add the NI rise and threshold change to the freeze in income tax thresholds, the IFS suggests that only those earning between £10,000 and £25,000 will pay less tax.

“In the next tax year, we expect a decrease in the basic income tax rate. However, despite this, by the time we get through four years of threshold freezes, almost every worker will be paying more tax in 2025/26.”

Joe Bateson, tax partner at KPMG UK, added: “Back in March 2021, the Chancellor announced that the personal allowance bands would be frozen for four years, meaning an additional 1.3 million people would fall through the tax net by 2026.

“The announcement of Health and Social Security Tax in September 2021 has added a further 1.25 per cent for those taxpayers with income or dividends, with the biggest impact being on those earning over £40,000.

“However, the rise in National Insurance thresholds from 6 July 2022 has pushed the edge of the cliff – the point at which the changes mean a reduction in pay – from £34k to £41.5k, which will be welcome for those in this pay bracket work. ‘

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Changes to National Insurance: Millions see their monthly pay rise as a threshold change

Source link Changes to National Insurance: Millions see their monthly pay rise as a threshold change

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