A new tax year starts today – and many of us will notice the tax on our pay-slips has just got a LOT scarier 👀 but why?
National insurance (or NI) is a form of tax that’s paid by many full-time and self-employed workers over the age of 16 as well as employers. It’s only paid as a percentage rate above a certain level of earnings or profits – that threshold is going up this month to £9,880.
NI is an important part of the tax system because you need to pay it to get certain benefits and the state pension later in life. In fact, you can make voluntary NI contributions to make sure you get your full entitlement.
It was originally devised as a tax paid by workers specifically to fund the National Health Service, known as a hypothecated tax, but over time, the money raised from NI has ended up going into the general pot of taxation available for the government to spend on whatever it likes.
National Insurance contributions are going up by 1.25 percentage points. So, the main rate for full-time employees will rise from 12% to 13.25%. Employers will also have to pay a higher rate, so experts are pointing out that this could make things even worse for workers because not only are we paying more National Insurance, but employers could end up reducing wages as a result of their own tax bill going up.
The money raised from this tax rise will go towards the NHS this year to help it cut down long waiting lists for treatment following the pandemic. Next year, the NI rates will go back to what they were previously, and the extra cash will be collected as a separate health and social care levy.
You can cut your tax bills by claiming tax relief for additional household costs if you have to work at home on a regular basis, either for all or part of the week.
Look at whether you’re entitled to tax-free benefits from your employer like a season ticket loan, 25% off childcare costs (up to £500 every three months) or salary sacrifice childcare.
If you’re switching company cars, going for a low-emission model will mean you’re taxed at a lower rate than if you have a gas guzzler. Finally, think about whether you can put extra into your pension to get long-term tax relief.
