The National Insurance threshold will rise from July 6 to £12,570 meaning that millions of workers should save £330 a year
Millions of people should find they have more money in their pay packets from this month thanks to a change to National Insurance contributions.
From Wednesday, the National Insurance threshold - the point at which it is decided you earn enough to start making payments - is going to rise meaning that the average worker will save hundreds a year because they will be able to keep more of their money before paying in. Here's how it'll work.
What is National Insurance?
National Insurance is rather like a form of tax on your earnings or on self employed profits if you work for yourself.
The money you pay in - either weekly or monthly - goes into a fund from which some state benefits such as the state pension, statutory sick pay or maternity leave are paid. The tax is deducted from your wages each month and you can see how much you are paying on your payslip.
You pay mandatory National Insurance if you're 16 and over and earn above the threshold to begin making contributions. It's this threshold that is about to change.
What is the threshold?
Between April 6 and July 5 the National Insurance Class 1 threshold is £9,880 and so if you earn less than this you don't pay any National Insurance. If you earn more, you'll have been paying 13.25% of your earnings between £9,880 and £50,270 and 3.25% on any earnings above £50,270.
But from Wednesday (July 6) the threshold at which you start making your first payments is rising.
Therefore Class 1 rates will only kick on on earnings over £12,570 - and so workers will be able to keep a little more of their money before they make their first contributions and some people will now not pay any National Insurance at all because they will now be earning below the threshold.
What will it mean?
Because the threshold is rising by almost £3,000 it means a lower proportion of people's salaries will be subjected to payments.
HM Treasury says it expects the move to benefit around 30 million workers - while around two million people will now be exempt from paying National Insurance all together because they don't earn enough under the raised threshold to meet the minimum amount at which you start making your first NI contributions.
The changes, should mean that someone earning around £15,000 a year will pay around £330 less in their National Insurance contributions annually because of the rise in the threshold.
For someone earning around £25,000 a year the saving could be somewhere between £240 and £250 and if you're earning £35,000 the reduction will be about £150.
What about April's social care increase?
While this change to the threshold from July 6 was first announced in March during Chancellor Rishi Sunak's Spring Statement there was already a planned hike to National Insurance charges coming into effect on April 6.
The social care levy added 1.25 percentage points to National Insurance rates from April 6, which the government said it was being forced to apply to help fund improvements to the NHS and the social care system in this country, following the pandemic.
So it's true that this reduction comes after a rise just three months ago which saw millions of workers actually pay more.
For many, the change this Wednesday will help reverse the impact of that 1.25 per cent National Insurance rise introduced in April and most likely leave people with a little extra to boot. The Chancellor has been quoted as saying he expects 70 per cent of workers to actually have their tax cut by more than the increase they faced in April.
"From this July, people will be able to earn £12,570 a year without paying a single penny of income tax or National Insurance,” Mr Sunak said during his Spring Statement.
"That’s a £6bn personal tax cut for 30 million people across the United Kingdom. A tax cut for employees worth over £330 a year."
Anyone earning less than around £35,000 should still be one of those better off when taking into account both April's rise and July's impending change to the threshold.
It is expected that these workers will see their pay packet return to roughly the same level that it was before April's rise came into force, possibly even a little better than that, which, with the cost of living continuing to rise and further increases in energy bills expected this autumn, is likely to be welcome news.