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National Insurance and income tax: How are they changing and how much do I have to pay? National Insurance and income tax: How are they changing and how much do I have to pay?
(32 minutes later)
There is speculation that the government might cut National Insurance (NI) or income tax in the Budget. The government is expected to cut National Insurance (NI) in the Budget.
However, previous changes to tax rules mean the amount people pay overall is rising.However, previous changes to tax rules mean the amount people pay overall is rising.
How could income tax and NI rates change in the Budget? How could National Insurance and income tax change?
Chancellor Jeremy Hunt has hinted that he will cut taxes, but at the weekend told the BBC it would be in a "responsible" way. Chancellor Jeremy Hunt has hinted that he will cut taxes in the Budget, buttold the BBC it would be in a "responsible" way.
He is now expected to announce a 2p cut to National Insurance when he delivers his Budget. He isexpected to announce a 2p cut to NI, taking the starter rate to 8%.
This would match the cut to NI for 27 million workers that was made following the 2023 Autumn Statement. A reduction for self-employed workers is due to take effect in April. This would follow a previous NI cut from 12% to 10% for 27 million workers in January. A reduction for self-employed workers takes effect in April.
Cutting NI by another 2p would save someone earning an average wage of £35,000 an additional £449 a year.
The International Monetary Fund (IMF) and the Institute for Fiscal Studies (IFS) think tank have both warned the government against unaffordable tax cuts.The International Monetary Fund (IMF) and the Institute for Fiscal Studies (IFS) think tank have both warned the government against unaffordable tax cuts.
Cutting the main rate of income tax by 1p would cost £7bn, according to the Resolution Foundation think tank. The Resolution Foundation think tank says a 1p cut to income tax would cost £7bn and a 2p cut to NI about £10bn.
LIVE: Budget 2024 - watch and follow Jeremy Hunt’s speech live
When is the Budget and what will it mean for my money?When is the Budget and what will it mean for my money?
LIVE: Budget 2024 - watch and follow Jeremy Hunt’s speech live
How has National Insurance already changed?
Since 6 January, 27 million employees have been paying 10% National Insurance contributions on earnings between £12,571 and £50,270. They previously paid 12%.
For someone on £35,000, this was worth about £450 a year.
NI on income and profits above £50,270 remains at 2%.
NI rates apply across the UK. It is not paid by people over state pension age, even if they are working.
Eligibility for some benefits, including the state pension, depends on the NI payments you have made.
How is National Insurance changing for the self-employed?
From 6 April 2024, two million self-employed people will pay 8% on profits between £12,571 and £50,270, down from 9%.
From the same date, they will no longer pay a separate category of NI called Class 2 contributions.
The government says the two measures will be worth £350 a year for a self-employed person earning £28,200.
Why are millions paying more tax?Why are millions paying more tax?
Millions of people will pay hundreds of pounds more in tax because of changes to the tax thresholds. These are the income levels at which people start paying income tax, or have to pay higher rates.Millions of people will pay hundreds of pounds more in tax because of changes to the tax thresholds. These are the income levels at which people start paying income tax, or have to pay higher rates.
These used to rise every year in line with inflation.These used to rise every year in line with inflation.
However the tax-free personal allowance - the amount you can earn every year before you have to pay income tax - has been frozen at £12,570 until 2028. Higher-rate tax will continue to kick in for earnings above £50,270.However the tax-free personal allowance - the amount you can earn every year before you have to pay income tax - has been frozen at £12,570 until 2028. Higher-rate tax will continue to kick in for earnings above £50,270.
Freezing the thresholds means that more people start paying tax and NI as their wages increase, and more people pay higher rates.Freezing the thresholds means that more people start paying tax and NI as their wages increase, and more people pay higher rates.
It will create 3.2 million extra taxpayers by 2028, and 2.6 million more people will pay higher rates, according to the Office for Budget Responsibility (OBR), which independently assesses the government's economic plans.It will create 3.2 million extra taxpayers by 2028, and 2.6 million more people will pay higher rates, according to the Office for Budget Responsibility (OBR), which independently assesses the government's economic plans.
The OBR expects the government to raise £25.5bn more a year by 2027-28 than if NI and income-tax thresholds had gone up in line with inflation.The OBR expects the government to raise £25.5bn more a year by 2027-28 than if NI and income-tax thresholds had gone up in line with inflation.
According to the IFS, by 2027-28 an employee earning £35,000 "will be paying about £440 a year more in direct tax overall as a result of all the changes to income tax and NI since 2021".According to the IFS, by 2027-28 an employee earning £35,000 "will be paying about £440 a year more in direct tax overall as a result of all the changes to income tax and NI since 2021".
How is National Insurance already changing?
Since 6 January, 27 million employees have been paying 10% National Insurance contributions on earnings between £12,571 and £50,270. They previously paid 12%.
For someone on an average full-time wage of £35,000 the IFS says the cut is worth about £450 a year.
NI on income and profits above £50,270 remains at 2%.
NI rates apply across the UK.
It is not paid by people over state pension age, even if they are working.
Eligibility for some benefits, including the state pension, depends on the NI payments you have made.
How is National Insurance changing for the self-employed?
From 6 April 2024, two million self-employed people will pay 8% on profits between £12,571 and £50,270, down from 9%.
From the same date, they will no longer pay a separate category of NI called Class 2 contributions.
The government says the two measures will be worth £350 a year for a self-employed person earning £28,200.
What are the current income-tax rates?What are the current income-tax rates?
Income tax is paid on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.Income tax is paid on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.
Income tax is also paid on some benefits and pensions, income from renting out property, and returns from savings and investments above certain limits.Income tax is also paid on some benefits and pensions, income from renting out property, and returns from savings and investments above certain limits.
The Basic rate is 20% and is paid on annual earnings between £12,571 and £50,270.The Basic rate is 20% and is paid on annual earnings between £12,571 and £50,270.
The Higher rate is 40%, and is paid on earnings between £50,271 and £125,140.The Higher rate is 40%, and is paid on earnings between £50,271 and £125,140.
Once you earn more than £100,000, you also start losing your tax-free personal allowance.Once you earn more than £100,000, you also start losing your tax-free personal allowance.
You lose £1 of your personal allowance for every £2 that your income goes above £100,000.You lose £1 of your personal allowance for every £2 that your income goes above £100,000.
Anyone earning more than £125,140 a year no longer has any tax-free personal allowance.Anyone earning more than £125,140 a year no longer has any tax-free personal allowance.
The additional rate of income tax is 45%, and is paid on all earnings above £125,140 a year.The additional rate of income tax is 45%, and is paid on all earnings above £125,140 a year.
These apply in England, Wales and Northern Ireland.These apply in England, Wales and Northern Ireland.
Some rates are different in Scotland.Some rates are different in Scotland.
The Scottish Government has already announced that a new 45% band will take effect from April 2024. The top rate will also rise from 47% to 48%.The Scottish Government has already announced that a new 45% band will take effect from April 2024. The top rate will also rise from 47% to 48%.
Who pays most in income tax?Who pays most in income tax?
For most families, income tax is the single biggest tax they pay.For most families, income tax is the single biggest tax they pay.
But for less well-off households, a greater share of family income goes on taxes on spending, known as indirect taxes.But for less well-off households, a greater share of family income goes on taxes on spending, known as indirect taxes.
For the poorest fifth of households, VAT is the biggest single tax paid.For the poorest fifth of households, VAT is the biggest single tax paid.
How do UK taxes compare with other countries like France and Germany?How do UK taxes compare with other countries like France and Germany?
You can look at the amount of tax raised as a proportion of the size of the economy, or GDP.You can look at the amount of tax raised as a proportion of the size of the economy, or GDP.
In 2022 - the most recent year for which international comparisons can be made - that figure was 35.3%.In 2022 - the most recent year for which international comparisons can be made - that figure was 35.3%.
That puts the UK right in the middle of the G7 group of big economies.That puts the UK right in the middle of the G7 group of big economies.
France, Italy and Germany tax more; Canada, Japan and the US tax less.France, Italy and Germany tax more; Canada, Japan and the US tax less.
So in comparison with other countries, the UK is not that highly taxed.So in comparison with other countries, the UK is not that highly taxed.
However, overall taxation is high according to historical rates.However, overall taxation is high according to historical rates.
At the time of the 2023 Autumn Statement, the OBR said taxes would rise "in each of the next five years to a post-war high of 38% of GDP".At the time of the 2023 Autumn Statement, the OBR said taxes would rise "in each of the next five years to a post-war high of 38% of GDP".
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