The National Insurance threshold has been lifted by £3,000 to equalise it with income tax, the chancellor announced in the spring statement today (March 23).
The threshold at which employees and the self-employed start to pay national insurance contributions will rise from £9,880 to £12,570 a year.
This is an increase of £2,690 in cash terms, and is worth £330 in the year. Originally this had been planned for the end of this parliament, but the chancellor has brought it forward.
The increase will be implemented from July this year, which the government said will ensure all individuals see the benefits of the increase as early as possible, while also allowing employers and payroll software providers sufficient time to update their systems.
Chancellor Rishi Sunak said the cut amounts to a £6bn personal tax cut for 30mn people across the UK, and he quoted the Institute for Fiscal Studies saying it is the “largest single personal tax cut in a decade”.
After a number of commentators called for the incoming health and social care levy of 1.25 per cent to be scrapped, Sunak confirmed it will stay, saying “it is right” not to remove it.
Laith Khalaf, head of investment analysis at AJ Bell, said: “A higher NIC threshold will soak up some of the government's revenues from the new health and social care levy, but it will also help with the cost of living, particularly for lower income households.”
Tim Walford-Fitzgerald, partner at accountancy firm HW Fisher said the decision to raise the threshold is a long overdue simplification and will make it easier for the chancellor to take the next step in aligning income tax and NIC.
“We see this as part of an opportunity to merge both income and NIC into one single tax further down the line. There are some barriers that still exist, but these are not insurmountable."
However, Steven Cameron, pensions director at Aegon, said the decision will be welcome but has longer term ramifications.
"Setting aside the [health and social care] increase, which will be ringfenced to pay for social care and NHS support, raising the threshold will reduce the amount being collected in NI from today’s workers to pay for today’s state pensions," he said.
"This will happen not just in the coming year but also in all future years, storing up longer term challenges for the funding of state pensions which are paid for out of NI on a pay as you go basis."
Earlier this month, the Centre for Policy Studies called on the government to raise the threshold to mitigate the impact from the planned tax hike on the poorest households.
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.
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.