In Focus: Tax Year End  

Govt urged to raise NI threshold to soften tax blow

Govt urged to raise NI threshold to soften tax blow
The Treasury has been urged to raise the NI threshold to £11,284 (Image credit: Carmen Reichman)

The Centre for Policy Studies has called on the government to raise the employee threshold for paying National Insurance to mitigate the impact from the planned tax hike on the poorest households.

The think tank said raising the employee threshold to £11,284, instead of the planned £9,880, would shield those on average and lower incomes from the tax hike.

The CPS wants the 1.25 percentage point hike, due to come into effect with the new tax year, scrapped altogether but so far the government has refused to do so.

It said the proposed concession would sacrifice about a third of the Treasury’s expected receipts from the NI rise, with the remaining burden falling on business and higher earners.

Robert Colvile, director of the CPS, said: “As families face rising energy bills and soaring inflation, the government must ensure it is not actively making life harder for those on low and average incomes. 

“By increasing the National Insurance threshold for workers, the government can alleviate some of the cost of living pressures and allow households a small degree of respite.”

The government's NI hike will be used to pay for the NHS and social care provision, and will turn into the health and social care levy at the start of the next tax year with NI reverting back to its current rate.

This means pensioners in work will also have to pay the new levy - despite people being exempt from NI payments after reaching state pension age.

The cost of living meanwhile is rising sharply, with inflation already hitting at a 30-year high of 5.5 per cent in January and expected to rise further to close to 8 per cent next month.

The ongoing war in Ukraine is putting yet further pressure on inflation as energy, fuel and food prices are pushed up further.

The Institute for Fiscal Studies estimates a median earner, who earns up to £27,500, will be £800 worse off next year as a result of the inflationary surge.

"With every week that goes by, the depth of the cost of living crisis becomes clearer – and the impact on households worsens. So the government’s planned 1.25 [percentage point] rise in National Insurance contributions, set to come into force in just two weeks, could not come at a worse time," said the CPS.

Its research found raising the threshold to £11,284 would protect the median earner from incurring a real terms tax rise of £182.21. 

It would cost the Treasury about £4.7bn of the £12bn it expects to generate from the NI rise and would limit the impact of the tax hike to the most affluent, as well as businesses. 

The researchers said: "This is not a perfect solution – businesses and high earners would still pay more, damaging growth, and separate measures would be needed to address the impact of higher energy bills on the most vulnerable. But at least it prevents the government adding insult to injury."