The Chancellor’s £3,000 increase in the national insurance threshold — aligning it with the level at which people start paying income tax — will help many lower- and middle-earning families facing a cost of living crisis.
Pension experts welcomed this simplification of the tax system, which will also help offset the increase to increase to NI announced in last year’s Budget, with those at the lower end of the earnings scaling benefiting the most. This is the largest single increase in a basic rate threshold, and will mean there is no NI or tax to pay on the first £12,750 of earnings.
However, pension experts warned that this move will not help those over the state pension age, who do not pay national insurance.
In addition there are concerns that lower NI receipts could create problems for ‘pay as you go’ funding for the state pension, and could potentially mean some of the lowest earners do not pay sufficient NI to qualify for this basic state pension.
Aegon pensions director Steven Cameron says: “The Chancellor’s decision to increase the lower threshold of earnings on which employees pay National Insurance by £3,000 to £12,570 will be welcomed by many as helping mitigate the cost of living squeeze.
“There had been calls for the Government to defer the increase of 1.25 per cent in NI, but Sunak clearly was not prepared to do so and instead has opted to make a major increase in the NI threshold. This will reduce the impact of this increase for all, and will take anyone earning under £12,570 out of paying any NI contributions.
However Cameron warned there were longer term ramifications. “Setting aside the 1.25% increase, which will be ring-fenced to pay for social care and NHS support, raising the threshold will reduce the amoun being collected in NI from today’s workers to pay for today’s state pensions. This will happen not just in the coming year but also in all future years, storing up longer term challenges for the funding of state pensions which are paid for out of NI on a pay as you go basis.”
He adds: “There have been calls for the planned increase in state pension age to 67 by 2028 to be deferred, but having lower NI receipts will make that less affordable. Similarly, lower NI receipts could once again call into question the ongoing affordability of maintaining the state pension triple lock.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown adds: “by lifting the threshold, care must be taken that workers earning less than £12,570 per year do not lose access to vital National Insurance credits for state pension. The state pension forms the backbone of most people’s retirement and therefore, they should ensure they do not incur gaps unnecessarily, that mean they end up with less in retirement.”
She adds: “Many benefits come with automatic National Insurance credits. For instance, Child Benefit, Universal Credit and Job Seekers Allowance will credit you automatically. Other benefits such as statutory sick pay will give you credits if you apply for them. It is therefore vital people worried they may no longer be getting National Insurance credits check to see what benefits they are entitled to, so these credits can be made.
