What are UK National Insurance and income tax rates and thresholds?
Chancellor Rachel Reeves is anticipated to introduce tax changes in the upcoming Budget on 26 November. While speculation suggested possible income tax increases, it’s reported that Reeves will refrain from raising income tax rates. Labour has committed not to increase income tax, National Insurance, or VAT for working individuals before the 2024 election. However, adjustments to thresholds—where tax obligations begin—may occur. Below are the current National Insurance and income tax rates and thresholds.
Understanding National Insurance
– What is National Insurance?
National Insurance (NI) funds various benefits, including the NHS, and is collected from employees, employers, and the self-employed. Those over state pension age are exempt from NI, regardless of employment status. Contributions affect eligibility for benefits like the state pension, and voluntary payments can fill contribution gaps.
– How does National Insurance work?
– Employees start paying NI at age 16 with earnings exceeding £242 weekly or self-employed profits of over £12,570 annually.
– NI is deducted automatically alongside income tax.
Current National Insurance Rates
– For Employees:
– NI dropped from 12% to 10%, then to 8% in 2024. This reduction saves a worker earning £35,000 approximately £900 a year.
– For Self-Employed:
– The NI rate on profits between £12,570 and £50,270 decreased from 9% to 6%, offering about £350 in savings for individuals earning £28,200.
– Earnings above £50,270 incur a 2% NI rate.
– For Employers:
– From April 2025, employers pay NI at 15% on wages exceeding £5,000, increasing from the previous 13.8% on salaries over £9,100.
– Employers are also subject to NI on staff benefits at 15%.
Current Income Tax Rates
– Earnings Threshold:
– Income tax applies to earnings over the tax-free personal allowance of £12,570.
– Income Tax Bands:
– Basic rate: 20% on earnings from £12,571 to £50,270.
– Higher rate: 40% on earnings between £50,271 and £125,140.
– Additional rate: 45% for income exceeding £125,140.
– Special Cases:
– Once earnings surpass £100,000, the personal allowance decreases, eliminating the allowance for incomes above £125,140.
National Insurance and Income Tax Thresholds
– Why These Thresholds Matter:
Recent changes mean many face higher overall tax burdens, despite the 2024 NI cuts. The inflation-freeze policy has left the tax-free personal allowance and higher-rate threshold unchanged until 2028, constraining financial relief for many workers. According to the Institute for Fiscal Studies, an average earner will only save £140 by 2027, with the threshold policy limiting the benefits of past tax cuts.
In summary, as tax discussions progress in the lead-up to the Budget on 26 November, understanding the UK National Insurance and income tax rates and thresholds is crucial for financial planning.