It’s taken a global pandemic and a potential world war but the UK is finally scrapping the legacy and utterly bizarre National Insurance thresholds. From July 2022 our income tax and NI thresholds will align.

Our weird NI thresholds

In the world of self employment we’ve always had an awkward National Insurance (NI) threshold to deal with. Income tax is relatively simple – a personal allowance of £12,570 from the 2021/22 tax year onwards and this is likely to remain untouched for some time. National Insurance on the other hand has always been a bit… weird. Ranging from a Class 2 Small Profits Threshold of £6,365 in 2019/20 through to a Class 4 Lower Profits Limit of £9,568 in 2021/22.

Small Profits Thresholds and Lower Profits Limits have always been quite confusing, these 2022/23 figures have now all changed!

I always got the impression that the 2022/23 figures weren’t set in stone. They weren’t publicised anywhere on the UK Government website and I had to rely on rumours and hearsay from accountants. Bearing in mind that at the time of writing we’re 2 weeks away from the start of the 2022 tax year and official thresholds hadn’t been published yet. Not to worry, it’s all changed – and hugely for the better. I could never understand why we needed separate thresholds for tax and NI. This is now fixed, great news. I suspect this is a step towards ditching NI altogether. Class 2 will be the next thing to go and with an aligned starting threshold we might as well ditch Class 4 and just pay 29% income tax. Hold your horses though! It’s taken a long time to get to this stage.

Spring Statement 2022

The Autumn 2021 budget was quite uneventful for the self employed but today’s announcement makes up for that somewhat.

Aligned Tax and NI thresholds for 2022/23

Today’s Spring Statement announces an increase in the annual National Insurance Primary Threshold and Lower Profits Limit from £9,880 to £12,570, aligning it with the income tax personal allowance from July. July might seem like an unusual date to start all this from but apparently it’s the earliest date that will allow all payroll software developers and employers to update their systems and implement changes. So a modicum of weirdness retained. How this will work in practice won’t be apparent until we complete our 2022/23 tax returns (due Jan 2024).

Reducing Class 2 NI for low earners

From April 2022, self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will not pay Class 2 National Insurance. This means lower-earning self-employed people can keep more of what they earn while continuing to build up National Insurance credits.

By my understanding that means the Lower Profits Limit, the threshold below which self-employed people do not pay National Insurance, will be:

  • April to June 2022: £9,880
  • July 2022 onwards: £12,570

HMRC have also stated that the tax and NI thresholds will remain aligned moving forwards and that… “self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs. Taken together, these measures will meet the government’s ambition to ensure that the first £12,500 earned is tax free.”. I presume they mean £12,570 and the £12,500 is just a typo.

And there’s more!

Increasing the Employment Allowance

In addition to the above, the Employment Allowance will increase from £4,000 to £5,000 from April 2022.

Reduction of income tax to 19%

AND the government will reduce the basic rate of income tax to 19% from April 2024. Interestingly that aligns with the starting corporation tax rate for companies making a profit under £50,000. I wonder if we’ll see that threshold change to £50,270 to bring further standardisation across the tax system? We shall see – you heard it here first folks!

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Last Updated on 23 March 2022 by Andy Mac