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Spring Statement: What Rishi Sunak’s national insurance threshold increase will mean for you

·Finance Reporter, Yahoo Finance UK
·4-min read
Spring Statement Rishi Sunak delivering his Spring Statement in the House of Commons, London. Picture date: Wednesday March 23, 2022.
Spring Statement: Sunak says 70% of workers to get an effective tax cut from the £6bn plan to lift NI threshold by £3,000. Photo: PA

Workers will keep an extra £3,000 before they pay national insurance as chancellor Rishi Sunak announced in his Spring Statement that threshold would increase to help families tackle the cost of living.

Sunak said the threshold at which employees pay national insurance contributions (NICs) will be lifted by £3,000 to £12,570 a year in what the chancellor called a £6bn personal tax cut for 30 million people across the UK.

“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,” he said during his Spring Statement.

The Institute for Fiscal Studies had said the move would compensate 70% of workers who will be hit by the 1.25 percentage point rise in national insurance contribution, which will kick in next month.

Read more: Spring Statement: Rishi Sunak cuts income tax and fuel duty

The Treasury said of those who benefit from the threshold increase, 2.2 million people will be taken out of paying national insurance altogether.

The national insurance change will bring the threshold to start paying the levy into line with that for income tax, at £12,570.

Watch: Spring Statement: Key takeaways from Rishi Sunak's speech

What is it?

National insurance contributions are mandatory for everyone over the age of 16, who is either earning more than £184 per week, or self-employed and making a profit of more than £6,515 per year.

However, the rates vary according to the workers salary and employment status, and are divided into different classes of payment.

Employees pay "class one" contributions, while the self-employed pay slightly lower rates of either "class 2" or "class 4" contributions, depending on how much they make.

“Class 3” are voluntary contributions designed for those who have gaps in their national insurance payments because of periods of unemployment or working abroad and need to pay more to be able to claim the full state pension.

How much will I pay?

Workers earning between £9,568 and £52,270 currently pay 12% towards NICs. The rate will rise to 13.25%, but in July the earnings threshold will be between £12,570 and £52,270.

Earnings over £52,270 will be taxed at 3.25% from April, up from 2%.

How much will you pay? Tble: Quilter (assumes primary threshold of £9,880 for April, May and June 2022 and £12,570 thereafter)
How much will you pay? Table: Quilter (assumes primary threshold of £9,880 for April, May and June 2022 and £12,570 thereafter)

“This means that the benefit to NICs payers will reduce over time as wage inflation pushes people into paying more, and is reflected by the fact the government estimate the cost to the exchequer to reduce from £6.2bn in 2022/23 to £4.3bn in the 2025/26 national insurance bill.

“This does of course mean that the national insurance primary threshold is tied to the personal allowance, which the chancellor has already fixed until at least 2025/26 so these bandings will remain static for a while yet. The government announced that the primary threshold and lower profits limit will only increase in line with CPI from the 2026/27 tax year onwards.

“This means that the benefit to NICs payers will reduce over time as wage inflation pushes people into paying more, and is reflected by the fact the government estimate the cost to the exchequer to reduce from £6.2bn in 2022/23 to £4.3bn in 2025/26."

Read more: UK inflation hits 6.2% as Sunak delivers Spring Statement

National insurance goes towards such benefits as the state pension, additional state pension, new state pension and contribution-based jobseekers allowance.

Ben Pollard, founder and CEO of Cushon, said: “Raising the national insurance threshold will provide at least some much-needed respite during the cost of living crisis especially for the lowest paid.

"Ahead of the announcement, many households across the country were nervously checking their finances and looking to cut their spending or savings — which could have a disastrous impact on their future financial security. However, with the latest spike in inflation, making every penny count is more important than ever before."

Watch: How does inflation affect interest rates?