National insurance is going up, as you've probably heard by this point. Yes, that is a tax rise in all but name.
But it's slightly more complicated than that. The chancellor, Rishi Sunak, last week unveiled in his spring statement a rise to the national insurance thresholds, too, which means some people will actually pay less national insurance.
Among the wider cost of living crisis, it's all very confusing, so we thought we'd explain the Nics (national insurance contributions) rise once and for all. Fasten your seatbelts (and purse strings)!
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What is national insurance?
National insurance, despite sounding warm and cuddly, is essentially another tax. It works slightly differently from income tax, but it's similar in principle: a percentage of your income each month gets taken off your paycheque at the source.
It is paid by workers between the ages of 16 and the state pension age (currently 66), and by their employers. It is a form of social security, and some benefits can only be paid if the claimant has contributed enough to national insurance during their lifetime.
How much are Nics right now?
The rate varies depending on your earnings, but the standard rate for employees earning between £184 and £967 per week is 12 per cent of their earnings. Any earnings below £184 per week are not taxed; above £967 per week, they're taxed at 2 per cent. Once you hit retirement age, you do not need to pay any national insurance contributions (Nics).
Employers' rates also vary, but the standard rate is 13.8 per cent of their employees' salaries. Self-employed workers must pay £3 per week, or more if their profit is above £8,632 per year.
Significantly, national insurance is only paid on earnings through work, and not via other routes. That means, for example, that private landlords do not pay any national insurance on the income from their properties.
When is national insurance going up, and by how much?
From April 6, 2022, Nics will go up by 1.25 percentage points for employees and employers, as well as the self-employed. That means employees earning between £184 and £967 per week will need to pay 13.25 per cent of their earnings.
Someone on the average UK salary of £31,772 would therefore pay £2,900.69 per year in national insurance contributions. That's up from the £2,664.48 they would have paid in 2021/22 current tax year, a rise of £236.21.
What about the thresholds?
This is where it gets really complicated. In July, the thresholds at which you start paying Nics will go up.
At present, earnings above £9,568 per year are taxed at 12 per cent for Nics; this is going up to 13.25 per cent on April 6, so for a few months, all workers will be poorer.
But then, from July, that threshold will go up by around £3,000 to £12,570 per year - the same level at which income tax starts to be paid. This will reduce the amount of your earnings that are taxable via national insurance.
The rate increase and the threshold increase together mean anyone earning about £35,000 a year or less will, overall, pay less in Nics than they do at present, while those earning more than that will pay more. The threshold will be frozen at that level, however, meaning, with inflation, that over time everyone will pay more Nics.
Why is national insurance going up?
When he announced the tax hike, Boris Johnson said: "This will raise almost £36 billion over the next three years, with money from the levy going directly to health and social care across the whole of our UK."
Initially, the money will go to the NHS to help it deal with the pandemic backlog. Thereafter, the government says it will redirect the money into social care.
