A change in how the tax is collected means that more than 2 million low-income workers won’t have to pay National Insurance.
An employee can now earn up to PS12,570 per year before they pay National Insurance. This is an increase from the PS9,880 per year.
The government raised the rate in April to raise funds for health and social services.
These changes will result in workers who earn less than PS34,000 per year getting less.
Analysts believe the latest change, which will be in effect in pay packets starting Wednesday, is yet another step in the “swings-and-roundabouts” of National Insurance policy.
They said that while it is important to help individuals cope with rising living costs, any savings could be quickly erased by rising prices and higher bills.
The UK’s employees pay National Insurance on the wages they earn. Employers pay additional contributions, while self-employed workers pay it on the profits.
The first payment change was made in April when employees, businesses, and self-employed began to pay an additional 1.25p per pound.
This meant that employees would now pay 13.25% & 3.25%, respectively, rather than paying National Insurance Contributions of 12% for earnings up to PS50270, and 2% for anything above that.
Self-employed people have seen their equivalent rates rise from 9% to 2% to 10.25% or 3.25%.
Ministers stated that the money was being used for social and health care in England and would be available for use by the administrations of Scotland, Wales, and Northern Ireland.
Opposition parties and backbench Conservative MPs were disapproval at the move, as it coincided directly with price increases and an increase in energy bills.
Rishi Sunak was the chancellor and responded by increasing the threshold at which National Insurance begins to be paid to employees to PS12570. This policy has since taken effect.
According to the government, 2.2 million workers will be exempted from paying National Insurance contributions and still receive credits towards their future state retirement pension. According to the government, seven out of ten employees would benefit from the changes.
An employee who earns PS20,000 per year will pay PS178 less National Insurance for 2022-23 than the previous year. A person earning PS50,000 will pay PS197.
The final change will occur in April 2023 when National Insurance rates are restored to their original levels. The new Health and Social Care Levy will collect the additional 1.25% and will not be collected by National Insurance. It will also be paid out of state pensioners.
Alice Haine, personal finance analyst for investment platform Bestinvest, stated that savings could make the difference between eating out every night or going without.
She added that “for others, however,” the amount won’t make a dent in the budgets because they struggle to pay their household bills amid rampant inflation due to soaring fuel, food and energy prices.
National Insurance is being paid by many employers, which may affect their ability to pay higher wages. Business groups also claim that this could be a problem.
Tina McKenzie from the Federation of Small Businesses stated that higher employer National Insurance contributions rates still translate into less money for pay rises and sustainable investment, recruitment, and discretionary spending.
According to the Institute for Fiscal Studies, overall, the increase in National Insurance for workers and employers will result in an additional PS10.9bn per year for the government.
Steven Cameron, director of Aegon pensions company, stated that ministers were “playing swings with roundabouts” regarding income tax and National Insurance.
This was due to the fact that the income tax threshold (also known as the personal allowance) was frozen in April 2021 Budget and will remain so until 2026. Also, the earnings threshold at which the higher tax rate is paid was frozen.
This means that people who receive pay increases are being drawn into higher income tax brackets.
