Ready for a big tax rise?

Paul Lewis explains what the new National Insurance changes mean

Ezra Bailey

If you work, your National Insurance Contributions (NICs) will rise by 10.42% from April 2022. And if you earn more than £50,270 a year they will rise by 62.5%.

Advertisement

No, you have not misread that.  The increase in the rate you pay will be the widely reported 1.25 percentage points – from 12% to 13.25%.  But that is actually a 10.42% jump (1.25 is 10.42% of 12.)  For self-employed people, the hike is even more dramatic: their current rate is 9%, and raising that to 10.25% is a 13.9% increase in the tax they pay on each pound.

NICs start once you’re paid above £9,568. But if you’re fortunate enough to earn more than £50,270 a year, the current rate on earnings above that level is 2%. From April it will rise by 1.25 percentage points to 3.25%. That is a 62.5% increase in the contributions you pay on each pound above that level.

Interested in financial advice?  Click to find out more

Putting the calculations this way clarifies that this seemingly small change is actually a big rise in the tax we pay. The Government’s Technical Annex to its plans says it will be an extra £180 a year if you earn £24,100 and an extra £715 a year if you earn £67,100.   A year later it will all change again.

From April 2023 the extra NICs will be replaced by an entirely new tax on earnings – the Health and Social Care Levy of 1.25%. This third tax on income will be charged on the same basis as NI but will be a separate line on your payslip.  People who work over state pension age will also pay it. (At the moment people in that group pay no NICs on their earnings so will escape the higher rates in April 2022. But because the new levy will eventually be partly used to improve the way that long-term care is paid for, the Government decided working pensioners should also pay it.)

At 1.25% on all their earnings above the threshold of about £10,000 a year, I calculate that the new tax will average around £2 a week for working pensioners.  It’s good to know what you’ll really be paying…

Advertisement

Paul Lewis presents Money Box on Radio 4

Interested in financial advice?  Click to find out more