National Insurance is Set to Rise – What Will it Mean for Graduates?
You may have heard that National Insurance contributions (NICs) are set to rise from April 2022. Here, we explain what they are and what impact the increase will have on graduates.
Photo: National Insurance card – The Daily Record
NICs are paid by most workers in the UK, and go towards funding different parts of the state benefits system (e.g. health and social care, state pensions, unemployment benefits).
How much you pay depends on how much you earn. It’s also slightly different depending on whether you are employed or self-employed.
The Prime Minister announced in September that NICs will increase by 1.25% in order to help fund health and social care costs.
Impact on employees
Employees only pay NICs once they earn more than £9,564 a year. So anyone earning below that amount won’t be affected by the changes.
People in employment currently pay 12% national insurance on earnings between £9,564 and £50,268, while anything earned above £50,268 attracts a rate of 2%. From April 2022, this is set to rise by 1.25%, meaning these rates will change to 13.25% and 3.25% respectively. For example, a graduate earning £20,000 a year currently pays £1,251 in NICs. From April 2022, this will rise by £130 to £1,381.
So how does this fit in with the rest of your tax obligations?
Graduates also have to pay income tax if they earn more than the Personal Allowance threshold (which is currently £12,570).
And any graduates earning more than £27,295 have to pay back their student loans (if they have a Plan 2 loan).
When you consider all of these contributions together, it means that – after April 2022 – graduates earning more than £27,295 will pay a marginal tax rate (the amount of additional tax paid for every additional pound earned as income) of 42.25%.
That means every additional pound you earn above that threshold of £27,295 will be taxed at 42.25% because you will pay 20% income tax + 13.25% National Insurance contributions + 9% student loan repayments.
Impact on self-employed people
What about the self-employed? That’s a little more complicated.
Self-employed people pay a weekly flat rate Class 2 NIC (currently set at £3.05) – but they can apply for an exemption if they make profits under £6,515 a year. These Class 2 NICs will not be impacted by the change next year.
However the self-employed also pay 9% Class 4 NIC on profits between £9,568 and £50,270, with any profits above that amount attracting a rate of 2%. These Class 4 contributions will be affected by the increase, with the rates rising to 10.25% and 3.25% respectively.
Where will the money go?
The funds raised by the tax increases will raise £12bn a year, according to the Government. It has said that the funds will be ring-fenced, initially going towards easing pressure on the NHS and clearing backlogs.
From April 2023, National Insurance will return to its previous level, and the extra tax (1.25%) will be collected as the new Health and Social Care Levy.
Find out more
Introduction to National Insurance (NI): why we have to pay it, when & how, plus what to do if you have paid too much or too little