How national insurance changes affect you from April 2022

Last Updated on 8 April 2022

Every year at this time I outline some tweaks and changes to the tax system, so that you can plan your finances better.

This year it’s more complicated, partly because of the government’s reaction to the pandemic and partly because of some decisions made by Chancellor Rishi Sunak to change the balance of who gets taxed and how.

Income tax – no change

The rules about income tax are the same in 2022-23 as they were for 2021-22.

• Your tax-free personal allowance is still £12,570.
• The basic rate of income tax is still 20%.
• You still pay 40% tax on earnings (and sole trader profits) above £50,270, or £41% on earnings above £43,663 if you live in Scotland.
• You still pay 45% on anything you earn above £150,000 (lucky you), or 46% if you live in Scotland.

With earnings going up to cope with inflation this means that more people will find themselves paying more income tax. This is what happens when the tax thresholds are frozen like this. It looks like the government isn’t charging us more tax, but in reality they are.

National Insurance is a tax – and it’s going up

This is where the fun starts!

National Insurance (NI) is a tax paid by workers. It also gives you a national insurance record which helps you get the state pension and some other benefits.

It’s going up by a whopping 10% or so this year, as the rates are being increased by 1.25 percentage points.

• The headline rate for employees is going up from 12% to 13.25%
• Class 4 NI on the profits of sole traders is going up from 9% to 10.25%
• Class 2 NI for sole traders is going up from £3.05 to £3.15 per week

…and then down again in 2023!

The plan is to reduce NI rates for employees and class 4 for sole traders next year. They supposedly go back to what they were in 2021. But at the same time they will bring in a new tax called the Health and Social Care Levy.

This new tax will be the same rates as this year’s NI increases – 1.25%. And it will start to appear on pay slips and tax returns from April 2023.

Bouncy bouncy

“Why put NI up and then down again?” I hear you ask. Why not introduce the Health and Social Care Levy this year?

The answer is they couldn’t do that quickly enough. It was simply easier to increase NI now and then get everything in place for the new tax.

Also NI is the same across the whole of the UK, so people in Scotland and Wales are affected by changes at the stroke of a pen in Westminster.

More NI changes from July

On top of everything else, the point at which you start paying NI is changing from July 2022. You will pay NI only on earnings/profits above £12,570 per year, just like income tax. This is a change from £9,568, so some people will pay less NI from July 2022.

The combination of (1) NI rates going up but also (2) the point at which you pay NI increasing means if you’re earning less than about £30,000 you will be no worse off. At least that will be true from July 2022. For April, May and June you will feel worse off if you’re a PAYE earner!

Dividend tax is going up too

For those of us running limited companies and taking out dividends, these taxes are also going up by 1.25 percentage points. Ostensibly this is to mirror the new Health and Social Care Levy being introduced, as with NI (see above).

I’m going to predict here and now that dividend tax does not get reduced when the Levy come in in 2023. It’s probably just a tax increase, full stop.

Posted on 01 April 2022