National Insurance: What’s changing this week and what does it mean for your pay packet?

From 6 July, everyone earning money through PAYE will get an income boost of around £30 a month as changes to the National Insurance threshold come into play. 

Chancellor Rishi Sunak said in his Spring Statement that he was raising the annual threshold at which workers start paying National Insurance from 6 July. This is currently set at £9,880 – and will go up by almost £3,000 to £12,570.

This means you can earn more before you start paying National Insurance.

This is the same level at which you start paying income tax – so from 6 July if you earn £12,570 or less you won’t pay a penny in income tax or National Insurance.

The increase in the National Insurance threshold was introduced in light of the current cost of living crisis and on the back of the controversial government hike in National Insurance rates that came into effect in April, when rates went up by 1.25 percentage points. The hike means workers now pay 13.25% on earnings up to £50,270, instead of 12%. For earnings above that, the rate of National Insurance is now 3.25% - up from 2%.

We explain what the changes mean for you and your next pay packet.

HOW WILL THE CHANGES AFFECT ME IF I GET PAID THROUGH PAYE? 

Essentially, no matter what you earn, employees will get about £30 more in their pay packet each month from July onwards. 

As a rough guide, here’s what you can expect to get each month, based on your salary.

If you earn less than £12,570 a year, you will not pay any National Insurance contributions or income tax.

If you earn £20,000 a year, your take-home pay was about £1,431 a month (after income tax and National Insurance payments) before July. But from July onwards, your pay will rise to about £1,461. This means an extra £30 a month. Note, the figure does not take into account pensions and other benefit deductions, so the actual amount you get may be different.

If you earn £35,000 a year, your monthly take-home pay before July was £2,265. From July, it will be around £2,295. Again, the figure does not take into account pensions and other deductions.

If you earn £55,000 a year, your monthly take-home pay goes up from £3,339 to £3,368 - excluding pensions and other deductions. 

According to the Treasury, 30 million workers will benefit, including 2.2 million people who will be taken out of paying National Insurance contributions (NICs) altogether because they earn less than £12,570.

However, when taking account of the higher rates of National Insurance that took effect from April, coupled with the higher threshold at which National Insurance kicks in from July, not everyone will be better off. 

According to the Institute for Fiscal Studies, those earning less than around £35,000 a year will see a fall in their overall NICs bill in 2022/23 compared to 2021/22. But, those earning more than £35,000 will pay more.

In April, the chancellor increased the National Insurance rate for the lower band of earnings (between £9,880 and £50,000) from 2% to 3.25%, and from 12% to 13.25% for the higher band (earnings above £50,000).

“The government has heralded July’s change as a cut in tax that will save the average worker £330 a year, but millions of people will actually be paying hundreds of pounds more in taxes when compared to the previous system,” said Laura Suter, head of personal finance at the investment platform AJ Bell (opens in new tab).

“By raising the National Insurance rates by 1.25 percentage points in April, Sunak has increased the tax burden for many, despite the July change in the threshold at which you start paying it benefitting some.”

HOW DOES THE CHANGE AFFECT ME IF I AM SELF-EMPLOYED?

The self-employed will also benefit from the rise in the National Insurance threshold to £12,570. 

Currently, self-employed people with profits of £6,725 or more (the 'small profits threshold') a year pay a flat rate NIC of £3.15 a week. These are known as class 2 contributions.

In addition to class 2, any profits above the 'lower profits limit' of £9,880 are also subject to 10.25% NICs, while profits over £50,270 are subject to a further 3.25%. These are called class 4 contributions.

Those with profits between the small profits threshold and lower profits limit don't pay any National Insurance.

From 6 July 2022, the lower profits limit will rise to £12,570, in line with the NI threshold for employees.

To reflect the fact that between April and July the threshold was £9,880 (equivalent to 13 weeks ), while the rest of the tax year has a higher limit of £12.570, the government has said an annualised threshold of £11,908 will be set for the self-employed for 2022/23. 

Lower earners will benefit more from the NI changes, while self-employed high earners face a bigger NI bill.

• Someone with self-employed income of £20,000 a year will pay £926 in NICs this tax year, compared to £1,098 in 2021/22
• Someone with self-employed income of £35,000 a year will pay £2,463 in NICs this tax year - just slightly more than last year, which was £2,448.
• Someone with self-employed income of £50,000 a year will pay £4,000 in NICs this year, a rise from £3,798 last year.

This is according to figures from AJ Bell using the TaxScouts (opens in new tab) calculator. They do not take into account any deductions like self-employed expenses, or income tax.