The case of HMRC v Gerald and Sarah Lee (2023) UKUT 242 focuses on the interpretation and application of private residence relief (PRR), also commonly referred…
Getting your NICs in a twist
The two headline grabbing comments arising from the Spring Statement 2022 that impact personal taxpayers were the increase in the lower threshold where national insurance contributions are paid (from July 2022) and the reduction in the basic rate of income tax from 20% to 19% (from April 2024).
I thought I would give a few examples of how this may impact some hypothetical taxpayers.
National Insurance Contributions (NIC)
Employees will around now be receiving their final salary payment for the 2021/22 tax year. The NIC deduction will be with reference to the current earnings threshold of £9,568 per year, with salaries above that and up to £50,270 charged to class 1 NICs at 12%, with anything above that charged at 2%. This is paid in monthly instalments through payroll deductions.
There is a similar charge for the self-employed, class 4 NICs, which they pay via their annual self-assessment tax return (albeit with a 9% main rate instead of 12%).
The change to the threshold where national insurance contributions are paid does not apply to the contributions made by employers, which remains at the lower amount of £9,100 from 2021-22.
From April 2022 the earnings threshold is set to increase to £9,880 but with the inclusion of the well trailed social care levy of 1.25%, the class 1 NIC rate will be 13.25%, up to £50,270 with 3.25% thereafter. For the self-employed class 4 NICs are rising to 10.25% from April 2022.
From July 2022 the earnings threshold for employees will increase to £12,570, with the other rates remaining the same. I suspect the delay until July is to enable software firms time to update their systems for PAYE administration.
The self-employed, who will not report their profits and pay the NICs on them, until 2023 will have their NICs calculated on a split-year basis so a threshold of £11,908 will apply for the 2022/23 tax year to account for this.
Incidentally, the self employed pay a fixed rate class 2 NIC if their profits exceed the thresholds mentioned. The increase in thresholds will remove some businesses from paying these contributions.
Certain benefits, including the state pension, depend on people making NICs or having income above certain thresholds allied with the NIC system. It does not appear that these limits have changed meaning that employees on earnings above the existing lower earnings limit for 2022-23 of £6,396 should still qualify.
For the self-employed, the government have said that “for 2022-23, the point at which the self-employed start paying Class 2 NICs will increase to £11,908. This means that those with profits between the Small Profits Threshold (£6,725) and the LPL (£11,908) will not need to pay Class 2 NICs from April 2022, but will still be able to access entitlement to contributory benefits.
So, what does this all mean to people’s net income?
Owain is employed with a salary of £12,570 a year. For 2021/22 he will have paid NICs of £360 (£30 per month). For 2022/23 he will pay NICs of £30 per month, but this will now reduce to £nil per month from July 2022. Owain will save £267 in NICs for 2022/23 as a result of the threshold change and will notice this at the rate of £30 per month, from July 2022.
Jemma has a salary of £35,000 a year. The corresponding figures for her are £3,052 (£254 per month) for 2021/22, £277 per month for the first three months of 2022/23 and £247 per month from July 2022. This is around the salary level that is the break even point for the changes. In other words, the point where they are put back in the place they would have been without the 1.25% increase or change to the threshold. Broadly, those with salaries or profits of more than this level will pay more in NICs than they would have in 2021/22 after the changes.
Sunil has a salary of £100,000 a year. He will pay NICs on his March 2022 salary of £490, on his May 2022 salary of £581 and on his August 2022 salary of £551. This represents an increase in NICs of £821 in 2022/23 compared to 2021/22 for Sunil, though this would have been £1,093 without the increased threshold for NICs from July 2022.
It is worth commenting that the personal tax allowance to which the new NIC threshold is aligned is frozen until 2026.
As the rate of class 4 NICs payable by the self-employed is at a lower rate than the class 1 NICs suffered by employees, the savings as a result of the changes are more modest. A self-employed individual with profits of £12,570 will pay £270 class 4 NICs in 2021/22 and £68 in 2022/23 (it would have been £276). On profits of £35,000 he will pay £78 more than 2021/22, but £208 less than they would have been without the threshold change. The breakeven point for 2022/23 compared to 2021/22, where the NIC is the same for both years, is just under £29,000 of profits for the self-employed. Above that profit level, the NIC is higher in 2022/23 than for 2021/22.
I am a tax adviser. I work a lot with numbers and flatter myself that I can manage to work out the basic rate tax charge on a chunk of income in my head. I divide it by five. From April 2024 I have to multiple by 19%, which is more of a stretch. I will divide by five and then subtract 1% of the income. A 1% reduction in income tax is quite an easy number to work out even if 19% is less so. Anyway, I digress.
The basic rate of income tax applies to income from all ‘non-savings, non-dividend’ taxable sources between the personal allowance of £12,570 and £50,270.
Somebody with total income, ignoring savings and dividends, of £22,570 (I like easy maths) will save tax from April 2024 of £10,000 x 1% = £100 a year with a 1% basic rate reduction. With income of £52,570, it is £300 per year. With income of £5,000,000 a year, it is also a saving of £300 per year.
Whereas the 1.25% social care levy impacts the self-employed and employed only, as does the increased threshold for NICs, the 1% basic rate band benefits other taxpayers, including landlords, with income above the personal allowance. There is however a 1.25% increase to the dividend tax rates from 6 April 2022.
A drop in the basic rate band does have other consequences though.
The Government recognise that charities that benefit from Gift Aid relief by reclaiming basic rate tax on donations will suffer from the reduction in the basic rate and are allowing a three-year transition period until 2027 for gift aid relief. Without this they would lose out on £12 for each £800 donated to them under gift aid for those three years, though that will be a cost from 2027 onwards all other things being equal.
Personal pension contributions are often made net of basic rate tax. If you invest £800 into a personal pension, it is currently topped up by £200 to make a gross contribution of £1,000. When the basic rate reduces to 19%, the same contribution will only gross up to £988. This represents a 1.2% reduction on the amount invested in the pension pot for the same contribution, which over time adds up. Well, subtracts to be more accurate.