National Insurance threshold rise
Mar 06, 2020
Pensions Personal Finance
Currently, workers start paying Class 1 National Insurance Contributions (NICs) once their annual earnings exceed £8,628. From 6 April 2020 this threshold will rise to £9,500 a year, meaning that a typical employee will save around £104 a year and the self-employed, (who pay a lower rate of NICs), will save about £78 a year. Those earning under £9,500 will pay no National Insurance whatsoever.
Meanwhile, the threshold at which employers must start paying employer NICs has also increased, but confusingly this is not in line with employees’ increase. Despite a recommendation from the Office of Tax Simplification back in 2017 that employer and employee rates should be aligned, once again we find ourselves with two separate NIC thresholds to consider which creates added complexity.
All the other NIC thresholds for 2020-21 will rise with inflation, except for the upper NICs’ thresholds which will remain frozen at £50,000, as announced at in the 2018 Budget.
State pension contributions
The number of qualifying years you have on your National Insurance record affects the amount of state pension you receive. However HMRC has made assurances that these NIC threshold changes will not affect low earners’ entitlement to contributory benefits such as the state pension. HMRC has stated that the Lower Earnings Limit and the Small Profits Threshold, above which individuals start to build entitlement to contributory benefits, will rise with the consumer price index measure of inflation.
Steven Cameron, Pensions Director at Aegon, commented on HMRC’s announcement:
“Those taken out of paying NI won’t lose out on credits towards their state pension. Anyone earning above the Lower Earnings Limit, which will increase with inflation from its current level of £6,136, will still be entitled to a year’s credit.
“This is important because people need at least 10 years’ credits to receive any state pension and 35 years to receive the full state pension. Without this provision, people might have gained from paying less NI today only to suffer from a reduced state pension in future.”
It’s worth noting that your 10 years of NIC credits don’t need to be 10 qualifying years in a row. The simplest way to check the status of your pension contributions to date is to check your personal tax account.
Both the basic state pension and the new state pension are set to rise in April 2020. They will increase by 3.9%, which is in accordance with the triple lock mechanism.
If you have any queries about National Insurance and state pension contributions then please get in touch with a member of the PT team.