Budget 2018: NIC changes reduce income tax benefits

Changes in the Budget to National Insurance Contributions (NICs) will have an effect on both the self-employed and higher rate earners, mitigating the impact of the increase to the thresholds for personal allowances announced by the Chancellor

In terms of Class 1 NIC rates and thresholds, the lower earnings limit will increase from £116 in 2018/19 to £118 per week for 2019/20. The primary and secondary threshold will change from £162 to £166 per week, a 2.5% rise, and the upper earnings limit will change by 8%, from £892 to £962 per week.

Currently people earning £46,350 or more pay 12% up to that level but 2% on all earnings above it. When the changes are implemented in April 2019 they will pay 12% up to £50,000 and 2% above this limit. This means that despite the 20% income tax threshold change to £12,500, the 10% increase in NICs will reduce this to 10%. For someone earning £50,000 the reduction in their liability of £860 per annum will be mitigated by a £333 increase in their NICs liabilities, leaving them only £526 better-off.

According to Gary Smith, chartered financial planner at Tilney, the significant increase in the NIC band ‘effectively negates 39% of the income tax giveaway’ to higher rate earners: ‘The main headlines following the Budget were obviously focused on income tax and how much better off higher earners would be in the next tax year. However, the subsequent increases to NI that have been announced will soak up a lot of the headline tax benefit.’
These changes will also have a significant impact on the self-employed, according to Patricia Mock, tax director at Deloitte: 'The rates and thresholds for national insurance will affect these giveaways for those with earned income, as the lower earnings threshold is lower than the personal allowance. This has been increased from £8,424 to £8,632 with the upper earnings threshold being increased to match the higher rate income tax threshold of £50,000. 
‘This means a Class 1 NIC saving for basic rate taxpayers of £25, and an increase for higher rate and additional rate earners of £340, giving an overall tax and NIC decrease for basic rate employees of £155, higher rate employees of £520 and additional rate employees of £260.'
Responding to the change, Mike Cooper, partner at Moore Stephens, said: 'The Chancellor seems to be funding at least some of the giveaway on income tax by taking away from the self-employed, to the tune of £1.6bn Class 2 NICs up to 2023/24.
'With the Treasury having to find the corresponding £9.6bn to fund the rise in the income tax personal allowances and thresholds, it seems that the self-employed have been an easy target to hit again. When this is added to the expansion of the rules on off-payroll working to the private sector, this is another Budget that will hit contractors very hard indeed.'
Tom Evennett, private client services partner at EY, said that NICs and tax thresholds should be aligned: 'The national insurance thresholds remains much lower than the personal tax allowance. This means, assuming 2018/19 rates, these individuals would also pay over £750 in national insurance. Those under 25 on the national minimum wage may be outside the income tax net, but even these people find themselves paying national insurance. A move to align the national insurance and tax threshold would have a much bigger impact on the really low paid.'
Class 1 NICs: Employee and employer rates and thresholds   
(£ per week – except where stated)      
       Tax year 
      2018-19 2019-20
Weekly Lower Earnings Limit (LEL)  £116 £118
Weekly Primary Threshold (PT)  £162 £166
Weekly Secondary Threshold (ST)  £162 £166
Upper Earnings Limit (UEL)    £892 £962
Report by James Bunney

James Bunney

James Bunney, Accountancy magazine and Accountancy Daily...

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