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True cost of National Insurance threshold change – here's how much tax you'll really pay

·4-min read
HMRC
HMRC

The taxman has been accused of using "sleight of hand" to disguise the true cost of Boris Johnson's National Insurance raid in an online calculator.

A HMRC tax tool launched to help workers understand the impact of their changing National Insurance contributions falsely makes it look as if the Government is reducing their bills rather than increasing them, campaigners have said.

From Wednesday, the threshold at which most people start to pay National Insurance on their earnings is rising from £9,880 to £12,570 a year - a change hailed as the biggest tax cut of the decade by the Prime Minister, despite the fact that he increased the rate of the tax earlier in 2022, meaning the vast majority of workers are still paying extra.

The Government's calculator says that a worker on £50,000 will pay £4,958 in National Insurance in the year to July 5, down from £4,968 to for the previous 12 months, a saving of £10.

However, this obscures the fact that Mr Johnson increased the rate of National Insurance by 1.25 percentage points in April at the start of this tax year - meaning that in fact, almost all workers will be left worse off by the overall effect of the changes.

Critics said that a fairer comparison would be between the current tax year and the previous one, so that workers can see the combined effect of both the rate and threshold changes.

In the year from April 2022, a worker on £50,000 will pay £5,049 in National Insurance. In the previous 12 months they would have paid £4,852. This comparison shows that instead of cutting their tax bill, the combined effect of the changes has cost them £197.

The figures are flattered at other salary levels too. Someone earning £70,000 would think their National Insurance bill had risen by £178 based on the HMRC calculator, according to analysis by tax accountancy firm Blick Rothenberg. A tax year comparison would show they are £447 worse off.

Those on £30,000 are told by the calculator that they will save £197. However, they will be just £53 better off over the course of the tax year.

A note on the online calculator warns taxpayers the numbers are just an “estimate” and not an “accurate reflection of your actual liability”.

A Treasury source said the tool was clear about how it worked and not designed to hide anything, saying using the 12-month period to July was a legitimate way of showing the effect of the tax change from the time it came in.

But Nimesh Shah of Blick Rothenberg said the Government was “misleading” people and said the calculation did not paint the “full picture”.

He said: “The savings suggested are not as glorious as they seem, while the cost for those who stand to pay more are understated.

“HMRC’s calculator plays on July’s NIC threshold increase and compares someone’s position across the periods July 2021-22 and July 2022-23.

"Comparing against standard tax years would be more obvious and a fairer reflection. Under the backdrop of rising inflation and cost of living, people need to be given fair and realistic information about their situation."

The Treasury has already come under fire for “smoke and mirror” tactics, claiming the change in NI thresholds as a tax cut for millions, when in fact anyone earning more than £50,000 will still pay more this year due to the rise in rates in April.

The Treasury's five-year freeze to personal allowances and other tax rises, including increases in corporation and dividend taxes, have taken the tax burden to its highest in 70 years.

Speaking ahead of Wednesday's cut in national insurance contributions, Boris Johnson said it was part of a package to help people grapple with the rising cost of living.

He told the Cabinet: "It will be in people's pay packets from tomorrow onwards and amongst other things it is there to help people up and down the country with the cost of living. It shows that the Government is firmly on the side of the British people."

Danielle Boxall of the Taxpayer's Alliance campaign group said: "It's disappointing to see HMRC resort to this kind of sleight of hand. Aligning income tax and national insurance may be a welcome step to simplify the system, but it will be easily offset by the highest tax burden in 70 years - leaving taxpayers out of pocket overall.

“If the government wants to give families and firms a respite from tax rises, they’d do well to simply bring forward the planned income tax cut instead of tricking taxpayers into thinking they're better off."

Labour's shadow chancellor Rachel Reeves said: "Instead of playing games with working people's taxes, the Government should never have gone ahead with this hike in the midst of a cost of living crisis.

“Using smoke and mirrors like these when working people are more out of pocket shows just how out of ideas and out of touch this Government is."

A Government spokesman said it had been “honest and transparent” about how its calculator worked. He added: “We wanted to make our online tool as easy to understand as possible”.

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