Tax campaigners welcome NIC threshold increase as step towards simplification

The Low Incomes Tax Reform Group (LITRG) broadly welcomes today’s announcement1 in the Spring Statement that the government will align the starting point for paying2 class 1 employee and class 4 self-employed National Insurance contributions (NIC) with the starting point for paying income tax – £12,570. The group has argued for many years that such alignment would be a simplification for lower earners.  

There could, however, be some complexity over the course of the 2022/23 tax year in which the transition occurs. The Chancellor announced that the increase will come into effect from July 2022 – part way through the 2022/23 tax year. This means that for the first three months of the tax year, the effective annual primary threshold and small profits limit will be £9,880, increasing to £12,570 for the remaining nine months of the tax year.

Kelly Sizer, Senior Technical Manager for LITRG, said:

“Since at least 2017,3 LITRG has recommended that the starting point for workers paying NIC be aligned with the income tax personal allowance. Today’s announcement to do this with effect from July 2022 will eventually prove to be a simplification for low-earners. It will also mitigate the increase in NIC rates from 6 April 2022 for those on the lowest incomes.4

“In the short term, however, we think there may be some confusion, because the change will come in part way through the tax year. Employees will see the benefit in their pay packets from July. But for the self-employed, there may be some confusion when they prepare their 2022/23 tax return as the lower profits threshold will be adjusted down to £11,9085 from £12,570 to reflect that the change only applies for nine months of the year.” 

LITRG has also long argued that the impacts of announcements affecting a person’s net income on welfare benefits need to be taken into account. The main in-work benefit, universal credit (UC), is calculated based upon a claimant’s income net of tax and NIC. This means that if a claimant’s tax or NIC liability increases, the UC award may go up; but equally a decrease in tax or NIC liability means the UC award may go down. 

Kelly Sizer, Senior Technical Manager for LITRG, said:

“Because of the interaction between tax and benefits, some people on low incomes will not see the full benefit of the increased NIC threshold. 

“For example, someone not claiming UC and earning £250 gross a week would see their net income increase by £6.896 a week from July. If claiming UC, that extra amount of earnings would be factored into the calculation of their award and, if tapered at 55%, it would mean that they were better off overall by only £3.10 a week.7”