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National Insurance – an unusual appearance in the limelight

By Ensors Team
12th Mar 2020

It was an unusual Budget.  For the first time that I can remember, the Chancellor did not mention Income Tax at all but there were, instead, a couple of announcements about National Insurance (NI).  In fact, NI is rarely mentioned in the context of Income Taxes, but this Cinderella tax is worthy of some attention.  With no changes to the rates of Income Tax, the reduction in NI was the only tax measure that will generally increase net wages – and even then, by a maximum of £104 next year.

NI is very important to the Exchequer; it raises nearly one fifth of all tax revenues (only just behind Income Tax and VAT).  Most people know that the basic rate of Income Tax is 20%, but how many know the rate of NI, or realise that the lower paid start to pay NI long before any Income Tax is charged?

The latest change is moving in the right direction, but the point at which NI starts to be charged on earnings is still not yet aligned with Income Tax.  So, although the threshold for NI is to be increased from £8,632 to £9,500, it is still some way off the £12,500 figure for Income Tax.  NI is then charged at 12% on earnings, up to £50,000 per year.  Above that level, the rate reduces to 2%.

This effectively makes the combined “basic rate of tax” for employees 32% and the higher rate 42%, which is not quite the same as is often reported in the press.  However, there is no NI charge on pensions, dividends, rental or investment income, and as a result many people who pay Income Tax do not also pay NI.

And finally, it is not always appreciated that employers also pay NI on wages at 13.8% which adds considerably to the cost of the employee’s salary.  This is reduced by the Employment Allowance, which is deducted from the employer’s NI bill.  The allowance is currently £3,000 and will increase to £4,000 from April 2020.