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Sunak reviews Spring Statement 22
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NIC changes: What you need to know

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Rebecca Cave answers questions from AccountingWEB members about the changes to national insurance contributions announced in the Spring Statement.

24th Mar 2022
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Here’s what you need to know about the changes to national insurance contributions announced by Rishi Sunak on 23 March. 

Employers’ class 1 NIC

The secondary class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement, and the rate is increasing from 13.8% to 15.05% on 6 April 2022. 

For 2022/23 the various secondary class 1 NIC thresholds are:

  Secondary class 1 NIC  Thresholds

For most employees the employer pays at 15.05% on wages:

Per week: £175
Per month: £758
Per year: £9,100
If the employee is an apprentice or aged under 21 employer pays class 1 NIC at 15.05% on wages above:
Per week: £967
Per month: £4,189
Per year: £50,270
For new employees working at least 60% of their time in a Freeport site the employer can claim relief from class 1 NIC on wages up to: 
Per week: £481
Per month: £2,083
Per year: £25,000

Employees’ class 1 NIC 

The rates of primary class 1 NIC paid by employees are increasing on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.

The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages.

The upper earnings limit (UEL) has also not been changed by the Spring Statement, and will stay at the proposed thresholds for 2022/23 of £967 per week, £4,189 per month, £50,270 per year. On earnings above the UEL, the employee will pay class 1 NIC at 3.25% for 2022/23.

The complication introduced by the Spring Statement is that the primary threshold (PT) for class 1 NIC will change part way through the tax year on 6 July 2022. The employee will pay class 1 NIC at 13.25% on earnings between the LEL and the PT for 2022/23.  

Class 1 NIC primary thresholds  6 April to 5 July 2022  6 July 2022 to 5 April 2023 
Per week £190 £242
Per month £823 £1048
Per year £9,880 £12,570
As NIC is paid according to the pay period, and is not cumulative, only nine months of earnings (from July 2022 to March 2023) will benefit from the higher PT.

Company directors tend to use an annual or quarterly earnings period. Those on quarterly pay will use the lower threshold for the first quarter to 5 July 2022, and the higher PT for the remainder of the year. Those on annual earnings period will use a PT of £11,908 for 2022/23 as specified in clause 4(2) of the National Insurance Contributions (Increase of Thresholds) Bill 2022.

Self-employed class 4 

The lower profits limit (LPL), from which class 4 NIC becomes payable, is also increased to align with the personal allowance of £12,570, but over two years. The upper profits limit is frozen at £50,270.

Tax Year  Main rate  Additional rate LPL Upper profits limit
2022/23 10.25% 3.25% £11,908 £50,270
2023/24 10.25%* 3.25%* £12,570 £50,270
* Including Health and Social Care levy

For 2022/23 the LPL will be £11,908, that is nine months of the increased level, to make it equivalent to the same NIC allowance enjoyed by employees. Although the self-employed individual will pay class 4 NIC at the main rate of 10.25%, which is three percentage points lower than the class 1 NIC paid on the same income band by an employee.  

Self-employed class 2 NIC

The class 2 NIC paid by the self-employed creates a contribution record for the individual, unlike the class 4 NIC, which is a pure tax. 

The class 2 small profits threshold (SPT) will remain in place from April 2022, but the individual will not be liable to pay class 2 NIC until their profits exceed the lower profits threshold for the tax year, which is aligned with the lower profits threshold for class 4 NIC.

Tax year  Flat rate per week  

 

Small profits threshold 

 

Lower profits limit 
2022/23 £3.15 £6,725 £11,908 
2023/24 TBA TBA  £12,570

New class 2 NI credit 

Where the individual has annual profits between the SPT and the LPL, they will effectively build up a NI credit for that year, while paying zero class 2 NIC. Note that the taxpayer has to make profits at least equal to the SPT for the year in order to benefit from this class 2 NI credit. 

In order to receive the class 2 NI credit the taxpayer will have to submit a tax return, although if they have no other income in the year they will have no tax to pay. 

The introduction of the class 2 NI credit does not eliminate the need for voluntary class 2 NIC payments. Where the trading profits are less than the SPT the individual may still wish to pay voluntary class 2 NIC in order to maintain their contribution record and qualify for the state pension, as well as for other contributory benefits.

Future alignment 

Now that the starting thresholds for all flavours of NIC and income tax are to be aligned, perhaps this could be the first step toward aligning the rules for these two taxes.

The sticking points will be the pay periods for which NIC is calculated, compared to the annual nature of income tax. Also, Scottish income tax has completely different thresholds for its five rates compared to the two thresholds for income tax that apply in the rest of the UK.

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Replies (32)

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By Hugo Fair
24th Mar 2022 17:14

"Also, Scottish income tax has completely different thresholds for its five rates compared to the two thresholds for income tax that apply in the rest of the UK."

It so happens that there are 5 'bands of rate' in Scotland right now ... but this can change whenever Holyrood so decides. As indeed is the case in Wales where the Senedd have the power to introduce new bands (for reasons that are not restricted to being based on earnings criteria).

But remind me, why is it that so many people seem to think aligning the Tax and NIC thresholds is such a great idea?
Simplifying the rules, or even consolidating the regimes into fewer discrete taxes, could well have advantages ... although, as with getting rid of loads of allowances etc, there would be losers as well as winners.
But calculating NICs is really not difficult at the moment - whereas making them cumulative YTD (presumably part of the dream of alignment) would certainly make the calcs harder!

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Replying to Hugo Fair:
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By Rammstein1
25th Mar 2022 08:38

Hugo Fair wrote:

"

But remind me, why is it that so many people seem to think aligning the Tax and NIC thresholds is such a great idea?

Do you think it is a good idea to have separate thresholds to pay 13.25% and 20% as an employee or 10.25% and 20% as a self employed person? Any simplification helps.

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Replying to Rammstein1:
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By Hugo Fair
25th Mar 2022 10:04

"Do you think it is a good idea to have separate thresholds to pay 13.25% and 20% as an employee ..?"
Not particularly, but nor do I see why 7 rather than 8 NI thresholds would be a radical improvement - hence my question (which I see you haven't answered).

I'm not really that keen on having 12 different NI categories (some applicable to a person irrespective of job, others specific to the job so a person can have multiple categories). But this is how the NI system has broadly worked since its inception (albeit with chancellors, from Gordon Brown onwards, keen to add more variety)!

As I mentioned, simplification (which is a 'good idea') invariably brings losers as well as winners and so tends to be avoided by politicians. But a statement of the quantified benefit to be obtained by such a simplification will get more attention.

In reality, almost no-one calculates payroll by hand any more (I do occasionally but more for mental training and to test software results) ... so it really doesn't matter if PT and ST are different does it?

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Replying to Hugo Fair:
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By unclejoe
28th Mar 2022 12:22

" ...almost no-one calculates payroll by hand any more...". Well, we should be able to calculate it by hand, or how can an employee verify that deductions are correct? I have been trying to work out a possible error for a friend. I've never had anything to do with payroll in my job, so am working from base principles. My friend has had up to five concurrent and intermittent jobs on payroll and is also self employed for some income (essentially locum care work). Overall his income is low, but he has had NI deducted. A check on pension status shows insufficient pension credit. Trying to identify why is a nightmare!

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By Catherine Newman
25th Mar 2022 08:00

Tax Simplification? Oh, It's National Insurance so it is not a tax.

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By BIGWAL
25th Mar 2022 08:54

Thank you Rebecca for your clear explanation. There was a lot of confusion immediately following the Chancellor's statement. 2 webinars I attended yesterday failed to provide much further understanding, so am really grateful for your clarification.

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Replying to BIGWAL:
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By Catherine Newman
25th Mar 2022 09:13

I second that. Manual calculations will be impossible.

I was meant to attend a webinar but chose to go to Cotswold Farm Park to see the lambing, take in the view and have a Full English.

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Replying to Catherine Newman:
the sea otter
By memyself-eye
25th Mar 2022 09:28

...and take home a lamb for sunday lunch!

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Replying to memyself-eye:
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By Catherine Newman
25th Mar 2022 18:11

LOL.

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Replying to Catherine Newman:
By JCresswellTax
25th Mar 2022 09:49

Where's your dedictation!?!

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Replying to JCresswellTax:
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By Catherine Newman
25th Mar 2022 18:11

Cotswold Farm Park.

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By BIGWAL
25th Mar 2022 09:23

Far better use of your time Catherine

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Replying to BIGWAL:
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By Catherine Newman
25th Mar 2022 18:09

I think so too.

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By CJaneH
25th Mar 2022 12:17

For low earners needing Class 2 contributions to ensure a state pension the new system is bonkers

Earnings £6,724 or less must pay £162.76
Earnings £6,725 to £11907 pay nothing but submit a tax return
Earnings £11,908 or more pay £162.76

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Replying to CJaneH:
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By Paul Crowley
25th Mar 2022 13:47

Good summary

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By Paul Crowley
25th Mar 2022 13:52

Much appreciated, as always.
The details are important
Maybe some Self-employed volunteers will now choose not to claim expenses incurred, subject to other income.
I always preferred the compulsory liability to voluntary.
Less hoops

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ALISK
By atleastisoundknowledgable...
26th Mar 2022 19:26

So are we still just paying our directors the ST £758?

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Replying to atleastisoundknowledgable...:
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By Ian McTernan CTA
28th Mar 2022 13:31

Unless they like paying Employer's NIC, yes.

Of course, that's the simple answer and you will need to review individual circumstances etc etc before deciding whether that level of salary is appropriate for your client taking into account all factors.

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By richard thomas
26th Mar 2022 20:33

I was so intrigued by the obvious oddities in the Class 2 proposals, as succinctly set out by CJaneH that I did the unthinkable and read the draft National Insurance Contributions (Increase of Thresholds) Bill 2002 published on HMRC’s website with Explanatory Notes.

The Spring Statement says at 2.12:

"2.12 The government is also taking steps to ensure that self-employed individuals with lower earnings fully benefit. Spring Statement announces that from April 2022 self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs. Taken together, these measures will meet the government’s ambition to ensure that the first £12,500 earned is tax free."

The Draft TIIN says:

“The legislation will also provide a power for HM Treasury to lay regulations to ensure that the threshold for paying Class 2 NICs is equivalent to the LPL, but that the regulations may treat individuals whose profits are between the SPT and LPL as having made Class 2 contributions.”

This is also what Rebecca says. Clause 3 of the Bill says:

“Equivalent provision for Class 2 contributions

(1) The Treasury must by regulations make provision for the purpose of securing that, for the purposes of—

(a) the Social Security Contributions and Benefits Act 1992, and

(b) the Social Security Contributions and Benefits (Northern Ireland) Act 1992,

the threshold for paying Class 2 contributions for a tax year is equivalent to the threshold at which Class 4 contributions become payable for that year.

(2) Regulations under this section may—

(a) also make provision having the effect that, in such circumstances as may be provided for, a person whose profits for a tax year are less than that threshold is treated as making Class 2 contributions;

(b) make provision having retrospective effect from no earlier than 6 April 2022;

(c) amend an Act of Parliament."

The Explanatory Note says:

Clause 3: Equivalent provisions for Class 2 contributions

“27 Clause 3(1) requires the Treasury to make regulations to ensure that the threshold for paying Class 2 NICs is equivalent to the LPL threshold.

28 Clause 3(2) specifies that those regulations may treat individuals whose profit is below the LPL as having made Class 2 contributions, that the regulations may have effect from 6 April 2022 and may amend an Act of Parliament.”

The only “threshold” that currently applies to Class 2 is the SPT, so regulations must (not may) increase the SPT to £11,908 and £12,570. Clause 3(2) seems to apply to all profits below the new level of SPT (that is certainly more obvious in the EN paragraph 28) but is subject to a caveat which is in the Bill but not the EN (typical!) that the Treasury may provide that the credit only applies in certain “circumstances”. It doesn’t seem to me to be a natural use of language to say that a circumstance includes a case where the profits are in fact greater than what used to be the SPT, but less than the new SPT.

If in fact the cockeyed proposal is what is intended then section 11 Social Security Contributions and Benefits Act 1992 (SSCBA) is going to have to be amended in quite a complex way. But the proposal is cockeyed because there is no logic and no fairness in requiring someone earning £1 or £0 to pay the contributions if they want credit, requiring someone earning £12,570 to pay the same amount if they want credit, but allowing someone earning £12,569 to pay nothing but get credit.

Rebecca’s article (and the LITRG statement) says that anyone in the apparent scope of paying nothing but getting a credit will still have to file a return. I wondered about that. Section 11A SSCBA may have to be changed as well if this is to be the case. That section provides so far as relevant:

“11A.—(1) The following provisions apply, with the necessary modifications, in relation to Class 2 contributions under section 11(2) as if those contributions were income tax chargeable under Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 in respect of profits of a trade, profession or vocation which is not carried on wholly outside the United Kingdom–

(a) Part 2 (returns), Part 4 (assessment and claims), Part 5 (appeals), Part 5A (payment of tax), Part 6 (collection and recovery) and Part 10 (penalties) of the Taxes Management Act 1970;”

Part 2 contains section 7 TMA. Immediately a clash arises because there is a separate provision for notifying HMRC immediately when a person has started to be a self-employed earner in regulation 89AA of the Social Security (Contributions) Regulations 2001 (SSCR). Arguably s 7 TMA, as applied by s 11A SSCBA, does nothing except to allow section 7(7) to be invoked so that for Class 2 purposes if no NICs are payable, nothing need be notified.

This argument is consistent with regulation 89(1) SSCR. This deals with cases where:

“… Class 2 … contributions are payable by a person other than in accordance with the Taxes Management Act 1970 (as modified by section 11A of the Act)”.

In what circumstances might this happen? If Class 2 NICs are payable why aren’t they within TMA as modified? Section 11A seems to apply to Class 2 contributions with no indication that it doesn’t include voluntary contributions by those under the SPT. But regulation 89 is aimed at just that class – voluntary contributors. They must be excluded by section 7 TMA as applied by s 11A SSCBA, but the only thing in s 7 that could do that is s 7(7).

If s 7(7) applies to voluntary contributors, a fortiori it will apply to those who have nothing to pay because they are between the current SPT and the new threshold. Of course if the self-employment is their only income they are already subject to exclusion from notifying by s 7(7), a position which at least some people if not HMRC agree with.

However as we all know the requirement to make a return is dependent not on notifying liability but on receipt of a notice to file. So if a person has registered for Class 2 HMRC will issue a notice to file an income tax return and a Class 2 return. And therefore Rebecca and LITRG are right. But the whole area is an overcomplicated mess for very little revenue. But HMRC must think it is very important as the rules about APNs apply to any Class 2 avoidance schemes! Yet there is apparently no penalty for failure to notify under Schedule 41 FA 2008 as that Schedule does not appear in section 11A SSCBA. (Of course FTN means no credit on your pension record – but that did not stop the government introducing a discrete Class 2 FTN penalty provision in 2009 which they repealed in 2015.

Thanks (4)
Replying to richard thomas:
By Duggimon
28th Mar 2022 09:48

Do you think with the weird interaction between the SPT and LPL here this is perhaps a transitional period and the SPT will in fact become the LPL very shortly, necessitating anyone earning profits below the LPL from making voluntary contributions to earn a credit?

Were they to do so it would, to my understanding at least, simplify quite a lot of what has been made complex by the new proposed amendment.

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By Moonbeam
28th Mar 2022 09:43

Thank you Rebecca - this is just what I need on my wall.

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By Claire Davis CSD
28th Mar 2022 09:44

So what is the new rate to get a NI credit for the employed - Class 1 rate?
Will it still be the lower level £9,100 - or the new higher level?

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Replying to Claire Davis CSD:
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By jillcaudle
28th Mar 2022 09:56

From the article above: "The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages."

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Replying to Claire Davis CSD:
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By psimonparsons
28th Mar 2022 10:02

Annual Lower Earning Limit (LEL) is £6,396.

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By MartinLevin
28th Mar 2022 10:45

At last someone else (I picked it up), that
"As Nat Ins is paid according to the pay period, and is not cumulative",
that indicates that HM Government/Treasury will benefit from a "windfall" for the payroll between 6 April 2022 and 5 July 2022.

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By Self-Employed and Happy
28th Mar 2022 11:59

Hilarious they reduce Income Tax and Increase NI.

Just increasing the tax difference between the employed and retired, there should be NI on pensioners earning above a different threshold (lets say £25k for example), ludicrous that people are living longer and this is never addressed because it's a "vote loser".

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Replying to Self-Employed and Happy:
By Husbandofstinky
28th Mar 2022 15:24

You can't beat the grey vote.

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By Ian McTernan CTA
28th Mar 2022 13:32

I wish they had simplified this and brought the employers thresholds in line too.

Instead we just have yet more brackets.

What happened to the tax simplification program?

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Replying to Ian McTernan CTA:
accountant in london
By Accountant in London
29th Mar 2022 09:54

where do I start ranting on this!

UK tax system is never going to get simple, especially since the changes that George Osborne brought in .... they are still going on with that.
Aligning IT and NI allowance is not going to make much dent in the simplification process!

- restriction of finance cost relief on rental income
- non-resident CGT
- Extention of ATED to lower value properties
- trust and IHT taxation for both UK and non-UK trusts
- changing the non-dom rules for individuals and those related to trusts
- Brits living abroad have lost their PPR relief on their EU properties if they decide to sell and return to the UK as UK is not in the EU/EEA.

I could go on......

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Replying to Ian McTernan CTA:
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By MartinLevin
30th Mar 2022 10:43

Ian, we spell it P-R-O-G-R-A-M-M-E here in the United Kingdom. The only way that we adopt the (North) American [program] is where it's a Computer Program - The GoodEnglish Professor

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Replying to MartinLevin:
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By richard thomas
30th Mar 2022 18:07

That's news then to Thomas Carlyle, and indeed to Professor Henry Sweet, the model for Professor Higgins in Pygmalion, who in "A new English grammar: logical and historical" (1892) wrote, in preface 9, "A less ambitious program (sic) would further allow of greater thoroughness within its narrower limits."

Do you mean "the only way"? Not "time" or "occasion"? Do you mean "adopt", after which I would expect the object to be "spelling"? Your usages are not ones that we in the United Kingdom would normally adopt.

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accountant in london
By Accountant in London
29th Mar 2022 09:46

I hope they will also increase the Auto-enrollment threshold, which is at 10k at the moment, any staff being paid more than 10k due to an increase in NI thresholds, the employer will also need to bear in mind AE duties.

Thank you for the summary.

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