National Insurance: What’s happening in July and what does it mean for your pay packet?

From 6 July, everyone earning money through PAYE, no matter what you earn, will get an income boost of around £30 per 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 around £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 this year 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 YOU IF YOU ARE ON PAYE? 

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

As a rough guide, here’s what you can expect to get each month, based on how much you earn.

• If you earn less than £12,570 you will not pay any National Insurance contributions or income tax.
• If you earn £20,000 a year, you can expect to take-home £1,431 a month, (after income tax and national insurance payments), before July. But from July onwards, your pay will be around £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 will be £2,265. From July, it will be around £2,295. Again, the figure does not take into account pensions and other benefit 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 benefits 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 where they earn less than £12,570.

According to the Institute for Fiscal Studies, if you take into account the higher rates of National Insurance that took effect from April – coupled with the higher threshold at which National Insurance kicks in from July, those earning less than around £35,000 will see a fall in their overall NICs bill in 2022/23 relative to 2021/22.

This means that while it will be a welcome relief for employees to see the amount deducted for National Insurance on their payslip fall from next month, many people will still be paying more money in NICs compared to when the chancellor started changing the system earlier this year.

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 - however due to the way they pay National Insurance - they won’t see the full benefit until the start of the new tax year in April 2023.   

Currently, self-employed people with profits over £6,515 (the small profits threshold)  a year pay a flat rate NIC of £3.05 a week. These are known as class 2 contributions.

In addition to class 2, any profits above the lower profits limit of £9,568 are also subject to 9% NICs, while profits over £50,270 are subject to a further 2% (these are called class 4 contributions).

However, the small profits threshold and lower profits limit are also being raised from July 2022. The small profits threshold will increase to £6,725 and the lower profits limit will rise to £11,908. Those with profits between the small profits threshold and lower profits limit won't pay any National Insurance.