At Spring Statement 2022 the Chancellor announced significant changes to National Insurance, that will impact the self-employed and employees from 6 July 2022, and see the Government meet its long-time ambition to align the National Insurance Contributions (NICs) and income tax starting thresholds.
The threshold at which employees are required to pay Class 1 NICs is currently £9,568, increasing to £9,880 from 6 April 2022. From 6 July, this threshold will increase again, to £12,570.
As a result of this change, some employees will find they no longer have a NICs liability whilst three quarters of those earning beyond the threshold will make an annual saving.
This saving equates to approx. £356 per annum once you take into account that Class 1 NICs will be paid at 13.25% from 6 April. The exception to this is the first 12 month period in 2022/23, since the £12,570 threshold does not apply until July.
Apart from those who will make a saving, there will be people for whom the cut simply balances out the 1.25 percentage point increase effective in April – broadly, those earning a salary of £38,000 or more.
For 2022/23, the starting threshold for employers will remain at £9,100, despite them being subject to the same 1.25% increase as a result of the Health and Social Care (HSC) Levy.
For self-employed individuals and company directors, who pay NICs on an annual basis, the 2022/23 limit is £11,908, being an annualised average of £9,880 and £12,570 (current Lower Profits Limit and increased Lower Profits Limit, respectively).
This represents a tax cut for approx. half a million self-employed individuals, dependent on their circumstances.
Furthermore, if profits fall between £6,725 (Small Profits Threshold) and £11,908 (Lower Profits Limit), self-employed individuals will receive an NI annual credit without needing to pay any NICs. NI annual credits count towards contributory benefits.
National Insurance should be taken into account with any tax planning, such as when to incorporate a business, or in relation to profit extraction.