Here’s what you need to know about the changes to national insurance contributions announced by Rishi Sunak on 23 March.
The secondary class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement, and the rate is increasing from 13.8% to 15.05% on 6 April 2022.
For 2022/23 the various secondary class 1 NIC thresholds are:
|Secondary class 1 NIC||Thresholds|
|For most employees the employer pays at 15.05% on wages:|
|If the employee is an apprentice or aged under 21 employer pays class 1 NIC at 15.05% on wages above:|
|For new employees working at least 60% of their time in a Freeport site the employer can claim relief from class 1 NIC on wages up to:|
The rates of primary class 1 NIC paid by employees are increasing on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.
The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages.
The upper earnings limit (UEL) has also not been changed by the Spring Statement, and will stay at the proposed thresholds for 2022/23 of £967 per week, £4,189 per month, £50,270 per year. On earnings above the UEL, the employee will pay class 1 NIC at 3.25% for 2022/23.
The complication introduced by the Spring Statement is that the primary threshold (PT) for class 1 NIC will change part way through the tax year on 6 July 2022. The employee will pay class 1 NIC at 13.25% on earnings between the LEL and the PT for 2022/23.
|Class 1 NIC primary thresholds||6 April to 5 July 2022||6 July 2022 to 5 April 2023|
As NIC is paid according to the pay period, and is not cumulative, only nine months of earnings (from July 2022 to March 2023) will benefit from the higher PT.
Company directors tend to use an annual or quarterly earnings period. Those on quarterly pay will use the lower threshold for the first quarter to 5 July 2022, and the higher PT for the remainder of the year. Those on annual earnings period will use a PT of £11,908 for 2022/23 as specified in clause 4(2) of the National Insurance Contributions (Increase of Thresholds) Bill 2022.
The lower profits limit (LPL), from which class 4 NIC becomes payable, is also increased to align with the personal allowance of £12,570, but over two years. The upper profits limit is frozen at £50,270.
|Tax Year||Main rate||Additional rate||LPL||Upper profits limit|
* Including Health and Social Care levy
For 2022/23 the LPL will be £11,908, that is nine months of the increased level, to make it equivalent to the same NIC allowance enjoyed by employees. Although the self-employed individual will pay class 4 NIC at the main rate of 10.25%, which is three percentage points lower than the class 1 NIC paid on the same income band by an employee.
The class 2 NIC paid by the self-employed creates a contribution record for the individual, unlike the class 4 NIC, which is a pure tax.
The class 2 small profits threshold (SPT) will remain in place from April 2022, but the individual will not be liable to pay class 2 NIC until their profits exceed the lower profits threshold for the tax year, which is aligned with the lower profits threshold for class 4 NIC.
|Tax year||Flat rate per week
|Small profits threshold
|Lower profits limit|
Where the individual has annual profits between the SPT and the LPL, they will effectively build up a NI credit for that year, while paying zero class 2 NIC. Note that the taxpayer has to make profits at least equal to the SPT for the year in order to benefit from this class 2 NI credit.
In order to receive the class 2 NI credit the taxpayer will have to submit a tax return, although if they have no other income in the year they will have no tax to pay.
The introduction of the class 2 NI credit does not eliminate the need for voluntary class 2 NIC payments. Where the trading profits are less than the SPT the individual may still wish to pay voluntary class 2 NIC in order to maintain their contribution record and qualify for the state pension, as well as for other contributory benefits.
Now that the starting thresholds for all flavours of NIC and income tax are to be aligned, perhaps this could be the first step toward aligning the rules for these two taxes.
The sticking points will be the pay periods for which NIC is calculated, compared to the annual nature of income tax. Also, Scottish income tax has completely different thresholds for its five rates compared to the two thresholds for income tax that apply in the rest of the UK.