Four Things To Know About National Insurance Contributions And The April Increase

4th February 2022

Last autumn the Government legislated for an increase in the rates of National Insurance contributions (NICs) in April 2022. This observation summarises some of the key facts about how NICs works and how much tax is due to rise in April.

1. Who pays NICs and what are the current rates?

NICs are a tax paid by employees and the self-employed on their earnings, and by employers on the earnings of those they employ. NICs are not charged on those with low earnings, or on pension income or investment incomes (such as dividends or capital gains). Employee and self-employed NICs are not levied on the earnings of those over the state pension age.

Table 1 shows the main rates of NICs. The main rates of employee and self-employed NICs currently start to be paid on earnings (or profits) above £9,568. From April, this threshold will increase to £9,880. The higher-rate threshold is £50,270 (and will stay at that level from April).

2. How are rates due to change in April?

From April 2022, the rates of NICs are due to increase by 1.25 percentage points (see Table 1). This means, for example, that the main rate for employees is due to rise from 12% to 13.25%.

Rates of dividend tax are also due to increase by 1.25 percentage points from April 2022. The dividend tax rate for basic-rate income taxpayers will therefore increase from 7.5% to 8.75%. For higher-rate tax payers it will rise from 32.5% to 33.75%.

The increase in NICs was legislated as a means to increase spending on health and social care. From April 2023, the 1.25 percentage point NICs increase will be replaced by a new Health and Social Care Levy (i.e. NICs rates will revert to their current levels). At that point, the Health and Social Care Levy is also due to be applied to the earnings of those above the state pension age.


3. How much more will people pay in tax?

Relative to 2021-22 NICs bills, two things will change in April. First, the threshold at which NICs starts to be paid will increase - this will reduce NICs bills. (Thresholds tend to increase each April to account for inflation). Second, the rates of NICs will increase.

Chart 1 isolates the effect of the NICs increase. It shows what the annual 2022-23 NICs bill would be for employees with different earnings (assuming they are under the state pension age) before accounting for the rise in NICs rates (green bar) and how much higher payments will be as a result of the rate rise (blue bar).

Table 2 provides more details and shows the overall change in cash payments after accounting for the change in the threshold and the rate rise. See full article - link below.

The self-employed pay less in NICs than employees, but will face the same annual increase (because both employee and self-employed NICs rates are due to rise by 1.25 percentage points).

Read more of this article at the Institute for Fiscal Studies HERE