National Insurance rise: What does the national insurance increase mean for me and new National Insurance rates

Chancellor Rishi Sunak outlined an increase to the National Insurance threshold in the Spring Statement 2022 – here’s why National Insurance is going up, when it will increase and when threshold will go up

National Insurance: What is the national insurance threshold? How NI is calculated and threshold increase, explained (Image credit: PA)
National Insurance: What is the national insurance threshold? How NI is calculated and threshold increase, explained (Image credit: PA)

The Spring Statement 2022 saw Chancellor Rishi Sunak outline a number of key measures to ease the rising costs of living in the UK. Among the new policies announced in Wednesday’s ‘mini Budget’ is an increase to the national insurance threshold.

National insurance is a tax paid by employees and employers which goes toward providing pensions, benefits and state support for people who are unemployed, retired or sick.

Pledging to “stand by” British workers and households on Wednesday, Rishi Sunak revealed that the threshold at which UK earners start to pay national insurance tax on their earnings will be raised – helping lower paid workers to deal with the increased cost of fuel, energy and food in the UK.

Money saving expert Martin Lewis said the national insurance threshold increase was a “good call” by the Chancellor and one that could save households up to £330 a year.

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But what is the national insurance threshold, and how much will the threshold increase by in July 2022? Here’s what you need to know.

What is national insurance and how is it calculated?

National insurance is a compulsory tax and state insurance system first introduced in 1911 by the National Insurance Act. It is calculated based on how much you earn before any tax or pension payments are deducted and whether these come above an earnings threshold

Whether or not you pay national insurance depends on your age, circumstances and how much you earn, but the mandatory payments on earnings go toward your state pension and entitle you to other benefits, such as Maternity Allowance.

What does the national insurance increase mean for me?

Many people will start to see a boost in their pay packets this month as they grapple with surging living costs.

From Wednesday July 6th, the threshold at which people pay National Insurance (NI) will increase. The move follows a controversial 1.25 percentage point increase in NI in April, to help pay for health and social care, which came amid a string of other bill hikes, including a jump in the energy price gap.

NI starting thresholds will rise from £9,880 to £12,570 from July 6. The UK Government has previously said this will benefit nearly 30 million working people with a typical employee saving over £330 in the year from July.

Seven in 10 (70%) workers who pay National Insurance contributions (NICs) will pay less, even after accounting for the health and social care levy, the Government said previously. Of those who benefit from the threshold increase, 2.2 million people will be taken out of paying NICs altogether, it added.

Why is national insurance rising in 2022?

While national insurance was initially created as a way to support sick, unemployed and retired workers and entitle earners to state benefits, the UK Government outlined a key change to national insurance last year.

Prime Minister Boris Johnson outlined new plans for a ‘Health and Social Care levy’ of 1.25% on national insurance payments to help support the UK’s recovery from the coronavirus pandemic and support the NHS. The 1.25% increase to national insurance payments will take effect on April 6 2022, despite opposition MPs urging for the planned national insurance rise to be ditched as living costs for families soar. The levy will see the national insurance rate for those earning above the threshold rise from 12% to 13.25%.

What is the national insurance threshold for 2021/22?

The primary national insurance threshold for 2021/22 currently sees a 12% national insurance tax apply to workers earning £9,568 per annum and above.

The rate is reduced for those earning £50,270 and above at 2%. From April 6th, the threshold was originally set to rise to £9,800, but it will now rise higher come July 2022 after the Chancellor confirmed a further increase in the Spring Statement.

How much will the national insurance threshold increase in 2022-23?

In this year’s Spring Statement, the Chancellor announced that the national insurance threshold will be raised by £3,000 in order to provide lower earners with a cushion against rising fuel, food and energy costs. This means that UK workers will not have to pay any national insurance tax unless they earn above the new £12,750 threshold, which will come into effect from July 2022, in what Mr Sunak called “the largest increase in a basic rate threshold ever.”

Rishi Sunak told MPs: “Our current plan is to increase the NICs threshold this year by £300, I’m not going to do that – I’m going to increase it by the full £3,000, delivering our promise to fully equalise the NICs and income tax thresholds. And not incrementally over many years, but in one go, this year.

“From this July, people will be able to earn £12,570 a year without paying a single penny of income tax or National Insurance. That is a £6 billion tax cut for 30 million people across the UK. A tax cut for employees worth over £330 a year. The largest increase in a basic rate threshold ever. And the largest single personal tax cut in a decade.”

How have experts responded to the national insurance rise?

Alice Haine, personal finance analyst at investment platform Bestinvest, said a £330 saving "won't stretch far when you realise that only equates to £27.50 a month".

She continued: "Yes, every penny counts in this cost-of-living crisis and for some, that £27.50 could be the difference between having dinner every night and sometimes going without.

"For others, however, that amount will barely make a dent in their budgets as they struggle to pay the household bills amid rampant inflation as soaring food, fuel and energy prices become the norm."

Ms Haine added: "All of this is set against a backdrop of falling real wages where runaway inflation is eroding any pay uplift workers receive, so any saving will quickly be swallowed up. Delve deeper in the NI figures, and the saving made in July on NI is actually not that great if you go back in time a little.

"This is because the threshold at which NI kicks in had already increased in April, going from £9,568 to £9,880, with the main rate for employees rising to 13.25% from 12%, as the Government sought to bolster the NHS and social care by introducing a 1.25 percentage point health and social care levy. It means those on lower to middle incomes, earning less than around £35,000 are the biggest gainers this month, as they will see their NI bill cut by more than the amount they pay through the 1.25 percentage point levy."

She said higher earners will still end up paying more overall.

Additional reporting by PA

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