The UK government has announced that it will not increase the primary rates of two significant personal taxes – National Insurance (NI) and income tax – ahead of the budget that is to be announced on the 30th of October. Despite this, the Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves have hinted that they may increase the rate of NI that employers pay in an attempt to cover what they call the £22bn “black hole” in public finances. While there was a cut made to the NI paid by workers and those who are self-employed in 2024, changes that were implemented to the tax calculation system mean that many taxpayers’ overall payments have risen.
The UK government uses National Insurance contributions (NICs) to fund the National Health Service (NHS) and pay for benefits. Workers, employers, and the self-employed throughout the UK pay NICs, but those over the state pension age who are still working are exempt. Eligibility for certain benefits, such as the state pension, is dependent on the NICs that are made over the course of one’s working life.
Employees who are over the age of 16 and earn at least £242 per week or have profits of at least £12,570 per year from self-employment begin paying NI contributions. An employee’s rate for National Insurance earnings below £50,270 was cut twice in 2024, from 12% to 10%, and then to 8%. The two cuts, according to the Conservatives, were worth around £900 per year for an employee who earned £35,000. Even if they earn a minimum of £12,570, self-employed personnel now pay 6% instead of 9% for all profits between £12,570 and £50,270. Employers pay a rate of 13.8% on employees’ earnings above £9,100 per year, as well as National Insurance contributions (Class 1A and 1B) on expenses and benefits granted to their employees, and it is widely speculated that the budget announcement will include plans for employers to pay on pension contributions.
For earnings from employment and self-employment profits throughout the tax year between April 6 and April 5 the following year, income tax is paid. It also applies to certain benefits and pensions, rental income, and investment and savings returns above particular thresholds. The basic rate of income tax is 20%, paid on annual earnings between £12,571 and £50,270, while the higher rate of income tax is 40%, paid on earnings between £50,271 and £125,140. An individual’s personal allowance of £12,570 that is tax-free is lost once their earnings surpass £100,000, and the additional rate of income tax of 45% is paid on all earnings over £125,140 per year. In Scotland, certain income tax rates differ, with a new 45% band that came into effect in April.
Despite the NI cuts made in 2024, the alterations to tax thresholds imply that millions will still have to pay more tax overall. These are the levels of income at which people begin to pay NI or income tax and when they have to pay higher rates. Previously, they were adjusted each year to reflect inflation. However, the NI thresholds and the tax-free personal allowance have been frozen at £12,570 until 2028, while the higher rate of tax continues to apply to earnings over £50,270. This freeze implies that as people’s incomes rise, more of them will start paying tax and NI, and more people will pay higher rates of tax. The Institute for Fiscal Studies (IFS) think tank reported that the freeze negates the advantages of the NI reductions for some workers. In the 2024-25 tax year, the average earner will save around £340 from the combined tax changes, and people earning between £26,000 and £60,000 will be better off. However, according to IFS, by 2027, the typical earner will be just £140 better off, with only those earning between £32,000 and £55,000 per year reaping the benefits.
Historically, taxation in the UK has been high. France, Italy, and Germany all have higher tax rates than the UK, whereas Canada, Japan, and the United States have lower rates. In 2022, the latest year for which global comparisons are available, UK tax revenues represented 35.3% of GDP. The UK government will collect 37.1p of every pound generated in the economy in 2028-29, according to the Office for Budget Responsibility’s assessment of the 2024 March Budget, which would be the highest level since World War II
Read the full article from The BBC here: Read More
