What does the National Insurance rise mean for your money?

5 min | 14 March 2022

The Chase team

The UK Government has announced that National Insurance (NI) will increase to fund social care and the NHS. Learn how this will affect you and get some practical ways to protect your finances.

Benjamin Franklin famously said: ‘In this world, nothing is certain except death and taxes’. From students to the self-employed, everyone is subject to pay tax on their income. Understanding tax can be difficult, especially after the recent news about changes to NI and income tax on dividends. Here’s what the changes mean for your pocket along with some ideas for reducing your tax bill. 

How much income tax do I pay?

If you’re just starting out in your career, you’ll probably be a Basic rate taxpayer. The first £12,570 of your annual income is your Personal Allowance and isn’t taxed. Above that, you’ll pay the 20% Basic tax rate until you reach £50,270. Between that amount and £150,000, you’ll pay the 40% Higher rate and then the 45% Additional rate on income above that.

If you’re married, you may also be entitled to the Marriage Allowance, which could reduce your total tax. But if you’re a high earner with a taxable income of over £100,000, you’ll lose some or all of your Personal Allowance.

There is also the personal savings income allowance where a Basic rate taxpayer pays no income tax on interest earned up to £1,000; this falls to £500 for Higher rate taxpayers and then nil for Additional rate taxpayers. There is also a dividend allowance of £2,000 and a Capital Gains Tax allowance of £12,500.

In Scotland (Opens in new window), the rates of income tax are different to the rest of the UK.

What is National Insurance, and why is it going up?

Income tax is not the only tax that affects your pay packet. Most UK workers also have NI contributions deducted from their earned income; this goes towards state benefits like your pension, statutory sick pay and maternity leave. Earned income includes wages and income earned by the self-employed. NI is not payable on unearned income from sources such as pensions, dividends, interest and capital gains. The government is also increasing the income tax rate on dividends by 1.25% as part of these changes.

The NI rate will rise at the beginning of the new tax year in April 2022, and workers can expect to see a 1.25% increase in their payments. If you are an employee, the rate of NI that your employer pays for you will also increase by 1.25%. This NI rate will continue until April 2023, when it will be replaced by the new social care levy, which is also set at a rate of 1.25%. Unlike NI, pensioners who still receive earned income will pay this levy. However, it won’t apply to income from pensions.

Dividend taxation

As NI is not payable on dividends, the income tax rate on dividends is increasing by 1.25%. The new rates will be an ordinary rate of 8.75%, an upper rate of 33.75%, and an additional rate of 39.35%. The dividend trust rate will also increase to 39.35% to align with the additional dividend rate.

The changes will apply UK-wide from 6 April 2022.

How will the National Insurance rise affect me?

If you’re an employee who earns between £9,880 and £50,270 a year, your NI will rise from 12% to 13.25% from 6 April 2022, so your take-home earnings will drop slightly. For example, if you earn £20,000 a year, you’ll pay £1,340 in NI, £126 more than using the previous 12% rate.

If you’re an employee who is a higher earner, your NI will rise from 2% to 3.25% on any earnings over £50,270 a year from 6 April 2022. So if you earn £60,000 a year, you’ll pay £5,667, £626 more than using the previous rates that were 1.25% lower.

These figures are based on employee NI contributions (Class 1 NI), but self-employed people will also see their NI (Class 4 NI) rate increase by 1.25%.

How to save money when it comes to tax

The good news is that there are ways to reduce your overall tax bill. If you’re not doing them already, here are six to start with:

  1. Check your tax code You should check your tax code each year to ensure it’s correct. If you’ve paid too much, you can claim back any overpayment from HMRC
  2. Marriage allowance If you’re married or in a civil partnership and earning below the Basic rate threshold, you could save £250 by transferring £1,260 of your Personal Allowance to your partner (if they are a Basic rate taxpayer)
  3. ISA allowance With an ISA, you can save or invest up to £20,000 each year, and any interest is tax-free
  4. Give to charity If you’re a Higher or Additional rate taxpayer, you can claim back the difference between the Basic rate and your tax rate on donations to charity using the Gift Aid scheme (Opens in new window)
  5. Tax-free childcare Under the tax-free childcare scheme, you can claim back 25% of your childcare costs up to a value of £500 every three months
  6. Pension contributions can be tax-deductible Consider if you could make additional contributions to your pension

Cutting back on your spending will make up for some of the damage to your pay packet from these changes to NI; this is where the Chase card could help. The Chase card gives you cashback on everyday purchases and is a debit rather than a credit card, so you’re in control of your spending.

The Chase card gives you 1% cashback on everyday debit card purchases for the first year, including groceries, travel and even fashion (some exceptions apply). That’s £15 back if you spend £1,500 a month on eligible purchases, a total of £180 for the year; that could help offset some of those NI losses.

You might also benefit from the Savings Tax Allowance (Opens in new window) on interest earned (unless you are an Additional rate taxpayer).

Figures are for the 2021/22 tax year unless otherwise stated.

 

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