On Wednesday 23 March 2022, the Chancellor announced his Spring Statement. Unlike most newspapers, I won’t quite go as far as to call it a “mini-Budget”, but it certainly did contain a sprinkling of tax reductions – including:
- Fuel duty cut by 5p per litre – effective immediately (for 12 months)
- Basic rate of income tax cut by 1% – effective from April 2024
- Increase in the starting threshold for when national insurance becomes payable – effective from July 2022
It is the third of these which I would like to spend a bit of time to explore further.
National insurance increase
National insurance is payable only on employment income and self-employment income (which includes partnership income). It is not payable on any other sources of income, such as pension or rental. Consequently, whilst this particular tax cut will indeed benefit a large number of taxpayers, it certainly will not benefit everyone.
However, the flip side to this is the national insurance increase which is now less than two weeks away. Last year the Chancellor announced that from 6 April 2022, the rate of national insurance would be increased by 1.25% points (eg from 12% to 13.25%). Working aged persons (whether employed or self-employed) who exceed the starting threshold will be caught by this rate increase. Many people whose income is wholly from other sources though – and hence will not benefit from yesterday’s threshold increase – are not caught by this 1.25% increase. The only exception to this is for people with dividend income in excess of £2,000. The 1.25% increase will also apply to income tax charged on such dividend income.
At present, the starting threshold for an individual paying national insurance is £797 per month – and will increase to £823 as from 6 April 2022. From 6 July 2022, this is being increased further to £1,048 – or £12,570 per year, which is the same level at which income tax first needs to be paid (on any source of taxable income). Even putting aside the financial benefit of this threshold increase, just the simple fact that the threshold will be the same for income tax and national insurance is a very welcome change in the sense that it simplifies the tax system.
The fact that there are multiple upcoming changes to the national insurance system means that the overall net impact will vary between persons. Some people will be better off (compared to 2021-22), some will be worse off, and some will be unchanged. This is illustrated as follows:
- John receives an annual salary of £12,000. This means that in 2021-22 he pays monthly national insurance of £24.36. From April 2022, this will decrease to £23.45. From July 2022, this will decrease to zero. The 1.25% increase will cease to be of any relevance to John after July 2022 because he will be below the starting threshold.
- Paul receives an annual salary of £24,000. This means that in 2021-22 he pays monthly national insurance of £144.36. From April 2022, this will increase to £155.95. From July 2022, this will decrease to £126.14. Overall therefore Paul will be better off – but he will nevertheless still be impacted by the 1.25% increase.
- George receives an annual salary of £48,000. This means that in 2021-22 he pays monthly national insurance of £384.36. From April 2022, this will increase to £420.95. From July 2022, this will decrease to £391.14. Consequently, whilst the threshold increase will assist George, he is overall still left paying more national insurance after July 2022 than before April 2022.
- Ringo receives no salary. His income is wholly rental income and bank interest. None of the national insurance changes have any impact on Ringo.
The Treasury’s rationale
Having a tax change commence mid tax year is a little unusual, and for employees it will cause a fluctuation in their take-home pay as illustrated above. The Treasury’s rationale for picking 6 July 2022 is that there is insufficient time for employers and payroll providers to get their systems updated before 6 April 2022, but equally they didn’t want employees to have to wait until 6 April 2023 before seeing the benefit. For the self-employed meanwhile, it means that their annual equivalent threshold for 2022-23 will be £11,908 (and then the full £12,570 thereafter).
Do you have any questions?
If you are unsure of the points raised from the spring statement or would like too talk to a tax planning expert, please get in touch with Alex Wavell – Chartered tax adviser, who works within the MooreBarlow Private Wealth team.