Understanding the new National Insurance changes

First published on 06 February 2020 by Alastair
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Let’s start by stating the obvious.  National Insurance (NI) is a tax, paid on earnings paid by both employees and employers.  It exists to help you build your entitlement to various state benefits, including the state pension, unemployment benefit and maternity allowance.

The difference between NI and Income Tax is that the former is not an annual tax. It applies to your monthly pay (or indeed weekly or any other period) and includes holiday pay, sick pay and maternity pay. If you earn more money one month, you’ll pay more National Insurance that month. Sadly, you can’t offset this if your pay is lower during the other months of the tax year.

In the current (2019-20) tax year, you begin paying National Insurance once you earn more than £166 a week and the rate you pay depends on how much you earn, viz,

  • 12% of your weekly earnings between £166 and £962
  • 2% of your weekly earnings above £962.

The Prime Minister announced that the threshold at which you start to pay NI will change in the new (2020-21) tax year.  This followed an election pledge to to change National Insurance rules so those in work would not have to pay it until they earn £12,500.  However, before we all get too excited, this is not happening straight away (although to be fair, no-one ever envisaged that it would).  Chancellor Sajid Javid has now confirmed that the threshold for National Insurance contributions will rise by more than 10%, to £9,500, from April, with legislation laid in Parliament on January 30 to that effect.

Again, we caution against everyone getting too excited.  These changes will not apply to absolutely everyone, but, according to the government, they do mean that a “typical” employee will make a saving of about £104 in 2020-21.  The self-employed, who pay a lower rate (to reflect the fact that they don’t receive sick pay, holiday pay, etc.) will have c. £78 cut from their NI bill.  However, for those at the upper end of pay scales, the top-level NI contribution thresholds will remain frozen at £50,000. In government/accountant speak, the Class 1 primary threshold and Class 4 lower profits limit will increase significantly while the upper limits remain unchanged. Other thresholds will see an inflationary increase.

 Crucially, the government has confirmed that these changes to the NI threshold will not affect anyone’s entitlement to their state pension.

If you want to see that actual government documents that describe these changes, have a look at these links:  Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2020.  If you are unsure or simply want to check how this affects you, please get in touch and we’ll happily advise you.

Julie Dowie, Accounts Manager

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