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11 Mar 2020

Budget 2020: National Insurance tax boost for 31 million workers

Find out if you'll be paying more tax from April 2020

As part of the 2020 Budget, Chancellor Rishi Sunak has announced National Insurance thresholds for 2020-21 tax year will be increased.

Both employed workers, and self-employed workers that pay Class 4 contributions, will be able to earn up to £9,500 in 2020-21 before National Insurance contributions (NICs) kick in.

Mr Sunak said this threshold rise will benefit 31 million workers, saving a 'typical employee' around £104 over the year.

In addition, a new National Insurance 'holiday' will be introduced for businesses that employ veterans, for the first year of their civilian employment.

Here, we explain how the changes could affect your tax bill.

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What are the National Insurance rates in 2020-21?

National Insurance rates in 2020-21 will stay the same, but the thresholds have gone up. This means you can earn more before paying a National Insurance contribution (NIC).

This could be good news for lower earners, who can now earn £868 a year more before they'll need to pay 12% National Insurance.

The government says this is the first step in the government's plan to raise the NI threshold to £12,500, so that it is equal to the personal allowance.

The 2% surcharge threshold has remained the same, at £50,000.

The rates you pay are staying the same, as shown in the table below.

Employed 2019-20Employed 2020-21
How much you earnClass 1 rateHow much you earnClass 1 rate
Less than £8,6320%Less than £9,5000%
More than £50,0002%More than £50,0002%

Self-employed National Insurance 2020-21

We are still waiting for the government to publish this information in full. We will update our story as soon as this information is available.

Self-employed 2019-20Self-employed 2020-21
How much you earnClass 2 and Class 4 ratesHow much you earnClass 2 and Class 4 rates
Less than £6,3650%Less than £6,4750%
£6,365-£8,632£3 per week (Class 2 only)£6,475 -£9,500£3.05
£8,632-£50,0009% + £3 per week£9,500-£50,0009% + £3.05
More than £50,0002% + £3 per weekMore than £50,0002% + £3.05

You can see how the amount you can earn before paying Class 2 and Class 4 contributions has crept up in the graph below:

The cost of Class 3 contributions, which are usually paid by anyone who has gaps in their National Insurance contributions (NICs), have not yet been announced.

Gaps in your NICs could affect your state pension in retirement, and could also affect your entitlement to some benefits.

From 6 April 2020, Class 3 contributions will look like this:

Unemployed/exempt 2019-20Unemployed/exempt 2020-21
Type of contributionsClass 3 voluntary contributionsType of contributionsClass 3 voluntary contributions
Amount£15 per weekAmount£15.30 per week

How much National Insurance will you pay?

As to how the changes might affect how much tax you pay, we've come up with some worked examples.

Someone who is employed and earns £30,000 a year would have had to pay £2,564.16 for Class 1 National Insurance in 2019-20. In 2020-21, they'll have to pay £2,460 - a reduction of £104.16.

For a self-employed worker with profits of £20,000, they'd have had to pay £1,176.52 in 2019-20 through a mix of Class 2 and Class 4 contributions. But in 2020-21 they'll pay £1,103.60.

If you're an employee and above state pension age (currently 65) you don't need to pay National Insurance.

If you're self-employed and above state pension age you don't need to pay Class 2 contributions. You do need to pay Class 4 contributions, but only for the tax year you reach state pension age, but no longer.

Use our National Insurance calculator for the 2020-21 tax year

Simply enter your employment status and your annual income/profits into the calculator below to find out how much National Insurance you'll pay in the 2020-21 tax year, starting 6 April 2020.

The calculator assumes self-employed workers will pay Class 2 contributions.

National Insurance holiday for employers of veterans

Mr Sunak announced a brand new measure to support the employment of UK veterans, which will be introduced from the 2021-22 tax year.

Any employers who take on a veteran won't have to pay any employers NI contributions for the first year of the veteran's employment, up to the Upper Earnings Limit. This is only for the veteran's first year of civilian employment.

The government has said it will consult on the design of this relief.

Review of IR35 changes

The reform of off-payroll working rules (also known as IR35) in private and third sectors was announced in the Autumn Budget 2018, and was set to be introduced in April 2020.

The government recently announced the changes will still come into force this year, but has announced a number of changes to make the transition smoother.

These include measures such as promising a 'light touch' approach for the first year, meaning businesses won't be fined for incorrect returns, but non-compliance after 6 April 2020 will be punishable.

To find out more, see our recent news story detailing the full changes as a result of the IR35 review.

What is National Insurance?

National Insurance is a tax you pay on your earnings.

Every person in the UK is issued with a National Insurance number before they start work - usually when they turn 16. These numbers are set by the Department of Work and Pensions, and they're used by the government to track how much tax you pay during your working life.

You pay different rates depending on if you're employed or self-employed - self-employed workers pay NI on their profits, via a self-assessment tax return.

The contributions you make are paid into a government fund, which pays for some state benefits such as statutory sick pay, maternity allowance, some unemployment benefits and the state pension.

National Insurance and the state pension are closely linked; in order to qualify for the maximum amount of state pension you must have made at least 35 years' worth of National Insurance contributions.

If you're not working for a stretch of time, you may be able to claim National Insurance credits, which will fill the gap between contributions made while at work.

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