National Insurance is cut next week, but most of us are still paying more tax

From 6 July millions of people will see their National Insurance bills cut, as the threshold at which people start paying the tax is raised to £12,570. The move means that most people on an annual salary of up to £12,570 will pay no income tax and no National Insurance.

However, while it will be a welcome relief for many people to see the amount deducted for National Insurance on their payslip fall from next month, most of us are still paying more tax than when Chancellor Rishi Sunak started changing the system.

The Government has heralded July’s change as a cut in tax, that will save the average worker £330 a year, but millions of people will actually be paying hundreds of pounds more in taxes when compared to the previous system. By raising the National Insurance rates by 1.25 percentage points in April Mr Sunak has increased the tax burden for many, despite the July change in the threshold at which you start paying it benefitting some.

In some ways it’s admirably audacious to announce a massive tax hike and then try to win plaudits for reducing the very tax rates you increased, but the end result is that much of the population will still be paying higher taxes. The OBR itself finds that for every £4 Rishi Sunak increased taxes by last year he’s only giving back £1 in the updated plans – which is far from a tax cut.

How much more will people pay?

We’ve compared how the current system stacks up to if the Chancellor had left National Insurance rates at 12% for the lower band of earnings and 2% for the higher band, as well as increasing the thresholds by inflation. Under the current system the rates were increased to 13.25% and 3.25% from April, while the lower threshold increased with inflation from April to £9,880 and then increased to £12,570 from July.

In the current tax year, anyone earning around £31,500 or less will be better off under the new system, to varying degrees. Someone earning the new threshold of £12,570 will pay £234 less in National Insurance this tax year than they would have under the previous system. However, the move doesn’t benefit the lowest earners, as they wouldn’t have met the threshold for paying National Insurance under the old system. For example, someone on £10,000 a year only saves £10 a year in National Insurance under the new system.

Anyone earning more than around £31,500 will face a bigger bill and higher earners will be hit with hundreds of pounds in additional National Insurance thanks to the Chancellor’s changes. For example, someone earning £35,000 will only pay £47 more in tax this year, but those earning £45,000 will be hit with an extra £172 in National Insurance in 2022/23. A higher earner on £80,000 will be paying £609 in extra National Insurance costs – more than £50 a month more, and someone on £100,000 is facing an extra £859 on their bill.

Source: AJ Bell. New system has National Insurance rates increasing to 13.25% and 3.25% with the lower threshold at £9,880 from April 2022 and then the threshold rising to £12,570 from July. Old system has rates staying at 12% and 2% and threshold increasing to £9,880 from April and remaining at that all tax year.

The five-year plan

Looking over the longer term, the figures look even more bleak for middle earners. If we look over the next five years, including the current tax year, someone on a £25,000 salary who sees average annual wage increases over that period will pay an extra £88 in tax. But it’s the middle earners where the squeeze really happens, as someone on £50,000 will pay an extra £1,821 in tax over that time thanks to Mr Sunak’s changes.

However, the higher earners come out better off, with someone on £80,000 actually paying £23 less tax over the five-year period. The higher earner anomaly is because under the new system the upper limit for National Insurance, where the lower 3.25% rate kicks in, will be frozen at £50,270 for the next four years, which means that as someone’s salary increases more of it is subject to lower rate of 3.25% National Insurance. This compares to the current system where both the upper and lower thresholds rise with inflation.

Sources: AJ Bell, ONS, OBR

How you're taxed will depend on your circumstances, and tax rules can change.

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