As the cost-of-living crisis tightens its grip on the UK, all eyes were on Rishi Sunak’s latest Spring statement on 23 March, in which the Chancellor announced that the National Insurance threshold will rise in the summer.
For payroll providers, amendments to software data, systems, and processes should be implemented by April and July respectively. Here’s an overview of what’s changing to share with your payroll services teams
It’s been reported that the Chancellor’s ultimate objective was to align the NICs starting thresholds with the income tax personal allowance.
As such, the Government announced that from July 6 2022, the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs will increase to £12,570. This brings the threshold in line with the personal allowance for income tax, also set at £12,570 per annum. The move ultimately exempts some of the UKs lowest-paid workers from payroll taxes and reduces obligations for many. Rishi Sunak has reported these changes as the ”largest single personal tax cuts in decades.”
Background to the changes
The steps towards aligning thresholds began in tax year 2020-21, where both PT and LPL were raised by over £800 to £9,500, representing a tax cut for 31 million workers. For 2021-22, the PT and LPL were increased by CPI to £9,568. The current legislated position for 2022-23 is a further increase to £9,880 from April.
Alongside these changes however, payroll service providers will recall that the Government’s Health and Social Care Levy, announced last year, also outlined that NICs will rise 1.25 percentage points per annum from April this year for Class 1 and Class 4 contributors. The measure also reduces Class 2 NICs liabilities to nil on profits between the Small Profits Threshold (SPT) and LPL, ensuring that no one earning between the SPT and LPL will pay any Class 2 NICs, while allowing individuals to be able to continue to build up National Insurance credits.
With April looming, alongside this sharp increase in social security contributions, Sunak’s increased thresholds attempt to reduce that obligation for the lowest paid workers and self-employed UK citizens, and reduce NIC obligations for around 70% of workers, to the tune of £330 a year. The move is said to eliminate some 2.2 million workers from paying Class 1 and Class 4 NICs and the additional Health and Social Care Levy, in addition to the current 6.1 million who already do not pay National Insurance.
Further measures and considerations
Furthermore, the Chancellor reported that from April 2024, income tax basic rate will be reduced to 19% (from 20%) for taxpayers in England, Wales and Northern Ireland, representing a tax cut in excess of some £5billion per annum.
Please remember that these changes to the basic rate apply to England, Northern Ireland and Wales only and don’t apply to Scottish taxpayers.
Outsourced payroll services
Staying up to date with constant changes to social, public and tax policy and manual updates of internal payroll processes can be costly, resource-heavy and time-consuming. The implications of getting changes wrong are vast.