National Insurance Changes: what are the implications for pensions?
It was announced by the Chancellor of the Exchequer that there are some significant changed to employees national insurance contributions this year.
Who pays National Insurance Contributions?
National Insurance contributions (NICs) are a tax on earnings paid by employees and the self-employed, as well as by employers on the earnings of their employees. NICs are not levied on low-wage earners, pensioners, or people with investment income (such as dividends or capital gains). Over the age of the state pension, no NICs are paid on employee or self-employed earnings.
What are the changed from April 6th
Rates Rising
NIC rates increased by 1.25 percentage points on April 6th. This means that the main rate for employees, for example, will increase from 12 percent to 13.25 percent.
Dividend tax rates will likewise rise by 1.25 percentage points beginning April 6, 2022. As a result, the dividend tax rate for basic-rate taxpayers will rise from 7.5 percent to 8.75 percent. It will increase from 32.5 percent to 33.75 percent for higher-rate taxpayers.
The rise in NICs was enacted as a way to boost health-care and social-care spending. The 1.25 percentage point increase in NICs will be replaced by a new Health and Social Care Levy starting in April 2023. (i.e. NICs rates will revert to their current levels). The Health and Social Care Levy will be imposed to people earning more than the state pension age at that time.
The point at which people start to pay NICs will rise
The main rates of employee and self-employed NICs began to be paid on earnings (or profits) over £9,568 in the 2021-22 tax year. This threshold will climb to £9,880 on April 6th (Thresholds tend to increase each April to account for inflation).
The threshold will be raised to £12,570 on July 6, 2022. In the Spring Statement, this adjustment was announced.
The £50,270 higher-rate threshold will stay unchanged.
Two things will change on April 6th in terms of the NICs bills for 2021-22. First, the NICs payment threshold has been raised (to £9,880) — this will result in lower NICs bills. Second, the number of NICs is rising. Because of the increase in tax rates, practically everyone who pays NICs will have a greater tax bill starting April 6th.
The threshold will rise to £12,570 in July, lowering tax bills.
Those earning less than roughly £35,000 will see a reduction in their overall NICs cost in 2022-23 compared to 2021-22 due to the higher rates and higher threshold. Those who earn more than this will see their entire NICs bill rise.
Self-employed people pay lower NICs than employees, although they are subject to the same annual increases (because they are subject to the same change in threshold and the same rate rise).
Overall, increases in NICs bills are expected to raise £10.9 billion in revenue in 2022–23, with income from the April rise in NICs rates expected to be significantly higher (£17.2 billion) than revenue reductions from the July increases in thresholds (£6.3 billion).
