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Sunak aligns NIC and income tax in Spring Statement

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The Chancellor announced a cut in the basic rate of income tax, and raised all NIC payment thresholds, but where is the money coming from?

23rd Mar 2022
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I was absolutely delighted that the Chancellor has taken up my suggestion (also proposed by the Institute of Fiscal Studies) of aligning the class 1 national insurance contributions primary threshold with the personal allowance of £12,570. 

As I predicted it is impossible to implement this change in payrolls run for April 2022, as it takes time to rewrite payroll software, but it will come into force from 6 July 2022. 

Note that the secondary class 1 NIC threshold, where employers start paying class 1 NIC, will not be raised to align with the primary threshold. Employers will pay class 1 NIC at 15.05% on most employees’ salaries above £9,100 from 6 April 2022. Different secondary class 1 NIC thresholds apply for apprentices and freelance employees. 

Self-employed NICs

The Chancellor has gone further than I expected, with plans to align the thresholds where the self-employed start paying class 2 NIC and class 4 NIC, with the personal allowance, but not immediately. 

The class 4 NIC lower profits limit will rise to £11,908 for 2022/23 and then be aligned with the personal allowance of £12,570 from 6 April 2023. This two-step increase is presumably implemented to shadow the delayed rise in the primary class 1 NIC threshold from 6 July 2022.

Class 2 NIC is currently payable once the individual’s profits for the year exceed the small profits threshold of £6,515. This relatively low payment threshold exists to allow self-employed individuals with small profits to build up a contribution record for the state pension and other benefits. 

From 2022/23 the threshold for paying class 2 NIC will be aligned with that for paying Class 4 NIC: £11,908 for 2022/23, then £12,570 for 2023/24. However, this large step up could leave many low-profit traders with no national insurance contributions for many tax years. 

To solve this problem, from 6 April 2022 self-employed traders with profits below the lower profits limit will be treated as if they had paid class 2 NIC, but in fact they will make no actual NICs payment.  

The Government has already published a draft National Insurance (Increase of Thresholds) Bill 2022, which will bring these changes into effect. This Bill will be fast-tracked through Parliament.    

Employment allowance 

In a sop to small businesses the employment allowance will rise from £4,000 to £5,000 from 6 April 2022. This allowance can only be claimed by employers that had a class 1 NIC liability of no more than £100,000 in the previous tax year. The increase will allow an eligible employer to pay one extra person on the national minimum wage without having to pay employer’s class 1 NIC.

The detail in the Spring Statement also confirmed that the employment allowance will cover the employers’ liability for the Health and Social Care levy.   

Basic rate cut 

The promised cut in the basic rate of income tax from 20% to 19%, is slated to apply from 6 April 2024, but that is a long way off. As the past month has shown, the world can change significantly in a few weeks, and I wouldn’t like to predict where we will be in the spring of 2024.

Tax cuts must be funded

In his Mais lecture last month Chancellor Rishi Sunak set out the principles that underpin his tax policy. At the core is a desire to cut taxes, but only where those cuts can be funded, and he restated that belief in his Spring Statement. 

To find out how much the tax cuts are all going to cost you need to dig into the Spring Statement 2022 policy costings document. For example, the increases in NIC thresholds to align with the personal allowance will cost £26.345bn over five years to 2026/27. 

The costings document sets out three additional sources of income for the Treasury:

  • HMRC compliance (tax enquiries): £3.156bn
  • DWP compliance (benefit fraud and error): £2.24bn
  • Student loans (frozen thresholds and increased interest): £35.215bn

The conclusion must be that the next generation will be funding today’s tax cuts by paying handsomely in increased student loan repayments.   

Autumn plans 

Perhaps further detail on how the tax and NIC cuts will be funded will be revealed in the Autumn Budget. All I could find in Sunak’s 12-page Tax Plan was a vague reference to reforming tax reliefs and allowances and an aspiration to make the tax system “simpler, fairer and more efficient”. I recall that that has been tried before with little effect.

Any Answers Live webinar, 9am Thursday 24 March

Join Richard Hattersley and a panel of tax experts as they grapple with all the questions arising from Rishi Sunak’s Spring Statement. The live episode starts at 9am, but will be available on demand afterwards.

AccountingWEB's Spring Statement coverage is brought to you in associaton with Accounting Excellence. The awards programme has 22 categories including small, medium and large firm of the year and specialist team awards for tax teams and payroll teams - Enter now

2022 Spring Statement in association with Accounting Excellence Awards

Replies (20)

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By Catherine Newman
24th Mar 2022 08:59

So this is where the tax increases are coming from-taxes on business. I am a 1 man limited company. I can't increase my salary due to the Employers NI (not covered by Employers Allowance) and dividend tax is going up to 8.75%.

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Replying to Catherine Newman:
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By NeilW
24th Mar 2022 09:25

Put your prices up then to compensate.

If you're self-employed in this way, then you have pricing power. Use it.

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Replying to Catherine Newman:
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By Thaya10
24th Mar 2022 09:45

Have a chat with your accountant. He will explain to you the ways and means of getting your allowances.

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Replying to Thaya10:
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By Catherine Newman
24th Mar 2022 16:56

I have been a Chartered Tax Adviser in practice on my own since 1996!

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Replying to Catherine Newman:
By Husbandofstinky
24th Mar 2022 11:07

I can empathise totally with you on this one. Even if your accountant is doing everything they can, this is still an increase in your tax burden. One man band limited company, employment allowance does not apply.

There are only so many ways to skin a cat on this one.

Tax burden is rising and there is no way in getting away from this despite all the political spin (33% - 36% GDP). Frozen allowances, increase in NI etc

They still want more tax at a time when disposable income has and continues to contract at an alarming rate.

Inflation has not kicked in properly yet, neither has the main energy price cap rise from next month. The proverbial will hit the fan towards the end of the year with the secodary anticipated increase in the price cap plus the massive elephant sitting in the wings of mortgage rates. Not everyone one is on a fixed term and even those who are, it won't last forever, with 8%+ predicted inflation rates, who knows where those rates will be in 6 months+ time.

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Replying to Catherine Newman:
Intercity
By Mr Hankey
24th Mar 2022 14:51

Get yourself a boyfriend/ girlfriend/ husband/ wife.

Stick them on the payroll and you'll no longer be a one person payroll, and will benefit from the employment allowance.

Pay them £797 per month and there will be no employee national insurance (as this is per-job rather than than per-person).

This slice of the extraction will cost you only 1% (20% personal income tax due, less 19% corporation tax saved) as opposed to the 8.75% you mention.

Make sure you trust this person, they do some work (like make the coffee) and pay them into your joint account, etc.!

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By moneymanager
24th Mar 2022 09:10

"The costings document sets out three additional sources of income for the Treasury:

HMRC compliance (tax enquiries): £3.156bn"

We have had a period of VAT deferrment, I paid the full sum two years ago, last Spring HMRC told me I owned it, they ignore all communications, debt collect agencies are involved thus effectively libeling the company, they recognise the issue and refer back to their "client" and I get transcripts of the call, HMRC continue to send me letters all the time the VAT account is showing there is nothing owed, finally, after another 19 minutes of my life in an early call and god knows how much effort and expense has been incurred by all parties, a human being in HMRC has done a bank trace, found and corrected it, are we to seriously expect that MTD is going to help and espeially when it involves the liable but least able?

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By moneymanager
24th Mar 2022 09:18

Shouldn't we be "funding" the Treasury by demanding repayment of failed Test & Trace systems, the government is refusing to say how much was spent on PCR tests that can tell you nothing about your actual health status, and prosecuting and obtaining repayment from fraudluent BBL loans, the investigation of all those contracts awarded to "pals" with zero prior experience in the provision of PPE, the possibilities are endless but what we need is rigour in both government and the executive.

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By RogerMT
24th Mar 2022 09:31

While the rest of his Spring statement is to be approved, if not applauded (the myriad different starting points for various classes of NI is going to take some unravelling!), the 1% proposed cut in basic rate tax is nothing more than an ideological sap, and in the grand scheme of things completely unnecessary.

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Replying to RogerMT:
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By matchmade
24th Mar 2022 09:59

RogerMT wrote:

the 1% proposed cut in basic rate tax is nothing more than an ideological sap, and in the grand scheme of things completely unnecessary.

Agreed - completely unnecessary. 20% is a much simpler number than 19% to work with for quick calculations, and why "cut taxes" like this whilst still freezing personal allowances?

But then Gordon Brown did the same kind of politicking - a totally unnecessary cut from 22% to 20% when the more progressive thing to do would have been an increase in allowances.

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Replying to matchmade:
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By RogerMT
24th Mar 2022 10:04

Indeed. The allowances increase was actually the Lib Dems' idea, much as I am loathe to credit them with anything! :)

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By evildrome
24th Mar 2022 12:09

Disappointed to see that everyone appears to have fallen out of a Tardis from 1931.

Let me be clear... the Gold Standard is over.

We have a Fiat currency government in a floating exchange rate world.

HMG can create a unlimited amount of £'s.

They do not need your money in order to finance their operations.

The only monetary purpose of taxation is to deny you the use of it to control inflation.

Your tax money is destroyed on receipt.

It is not possible to control inflation by removing money from the economy and simultaneously spending the same money.

Again.... HMG has no need of your money. It can create as much as it likes.

Treasury prints as many Gilts as it likes and it instructs the BOE to purchase them.

It's as simple as that.

The accounting of a currency issuer (Government) is not the accounting of a currency user (you).

They are the umpire, you are the player.

When the umpire issues points, where do they come from?

When the umpire fines players points, where do the points go?

From nowhere, back to nowhere.

A currency issuing government can never run out of its own currency.

There is no "cannot afford" for such a government.

This does not mean that government can spend an unlimited amount of money.

Deployable real resources (people & things) limit what a government can or cannot do.

Not "money".

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By Jem Cattle
24th Mar 2022 12:18

Maybe aligning the thresholds will pave the way to rolling tax and NI into one tax. Probably politically infeasible but it would at least be taking tax simplification seriously.

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Replying to Jem Cattle:
Morph
By kevinringer
24th Mar 2022 13:05

They were aligned in the past but were not merged despite how sensible that seemed at the time. Since then taxes have got more complex which reduces the likelihood of merger even more.

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Replying to kevinringer:
RLI
By lionofludesch
24th Mar 2022 17:15

kevinringer wrote:

They were aligned in the past but were not merged despite how sensible that seemed at the time. Since then taxes have got more complex which reduces the likelihood of merger even more.

There's more to it than just merging the taxes. How's that going to work for interest or rental income ? Who's going to pay the secondary NI for the self employed ? Are they to be on a 48.3% basic rate ?

Merging would only work for employees and work poorly at that.

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Replying to lionofludesch:
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By Hugo Fair
24th Mar 2022 17:54

Merging IT and NICs will never work (or indeed be contemplated) if only because they exist for different purposes ... and, no, I'm not talking about hypothecation.

Taxation is not merely a means of raising revenue for the state, it is part of the toolkit with which governments try to enforce (or at least support) policies ... and, as such, their effectiveness as levers depends on where/how they have an impact.

NICs are at heart an employment tax, whereas IT is an (indirect) expenditure tax.

What *might* make more sense (but probably not politically advisable) would be to admit all this and, for instance, combine primary & secondary NI into a single tax on employment (payable solely by employers).
This would probably require a re-balancing of the tax targets such that only c. 1/2 of the 'lost' primary NICs are loaded on to the new employer NITax ... with the other 1/2 being spread across IT bands/rates.

Why bother? Well with the levers now focussed in the relevant places, it would be possible (if so desired) to try engineering some truly progressive policies.
For instance, you could invert the usual ratcheting effect when applying the employer's NITax ... so that the rate decreased as the employee's earnings increased (for lower earners only). Basically the employer might have a choice ... pay Jo £20k pa and pay NITax of £5.66k on top, or pay Jo £22k pa and only pay £3.16k on top - and so on.
Result = Jo's happier; ER is happy; state hasn't lost as much as it seems (due to tax on higher earnings & reduced UC pay out) ... and process can be fine-tuned by Chancellors without unintended deleterious effect on other areas.

Of course I'm not an econometrician so my 'modelling' may well be faulty - but the principle holds true (of admitting the purpose of taxes and applying them to the relevant areas openly).

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By Catherine Newman
24th Mar 2022 16:52

Your accountant he????

As a women I have 350 clients.

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Replying to Catherine Newman:
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By User deleted
24th Mar 2022 17:20

As a long time 'lurker' on Any Answers, who has benefited from your many contributions, this well meaning (if misguided) advice did make me chuckle.

Apparently not everyone reads AA - surprising, given it's the best part of the site!

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Replying to User deleted:
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By Catherine Newman
24th Mar 2022 18:19

Thank you very much CB123.

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By Catherine Newman
24th Mar 2022 17:13

Kevin Ringer and I met at the House of Lords re MTD for VAT Call for Evidence. I have only heard of you to date and the big hitters apart from Kevin aren't on here.

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