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3 Mar 2021

Budget 2021: income tax and National Insurance changes revealed

Find out if you'll be paying more or less tax on your income from April 2021

Income tax and National Insurance thresholds to rise in 2021-22, but will remain frozen until 2026, according to today's Budget speech.

Chancellor Rishi Sunak announced both the personal allowance and higher-rate thresholds, along with National Insurance thresholds, will increase by 0.5% from 6 April 2021.

However, taxpayers won't see any further rises for another five years until 2026, as the government goes about trying to reduce its vast debt, meaning thousands of people could end up paying more tax in future tax years.

Here, Which? reveals how the changes will affect how much income tax and National Insurance you'll pay from April 2021.

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How much income tax will I pay in 2021-22?

In his Spending Review at the end of November 2020, the Chancellor said the personal allowance and higher-rate tax band would rise in accordance with September 2020's rate of CPI inflation which was 0.5% - this was confirmed in today's Budget.

The table below shows how income tax is set to change for 2021-22.

Tax bandIncomeTax rateIncomeTax rate
Basic rate£12,500-£50,00020%£12,570-£50,27020%
Higher rate£50,001-£150,00040%£50,271-£150,00040%
Additional rateMore than £150,00045%More than £150,00045%

This means that you can earn an extra £70 without paying any income tax from 6 April 2021, and higher earners will pay the higher-rate of income tax on a smaller proportion of their money.

However, with thresholds set to freeze until 2026, many people may find they're pushed into paying more income tax as their wages increase over the next five years.

How does the personal allowance compare?

The government has raised the tax-free personal allowance by 93% since 2010, when it was £6,475.

And from April, workers can earn up to £12,570 before having to pay income tax.

The graph below shows how the personal allowance has changed over the years.

Income tax in Scotland

The Scottish Budget was held on 28 January 2021, when the Scottish parliament announced that its income tax bands and rates would remain the same, but all thresholds would rise in line with inflation - apart from the top-rate band, which will remain at £150,000.

Scottish income tax rates 2021-22

Tax bandIncomeTax rate
Personal allowance£0-£12,5700%
Starter rate£12,571-£14,66719%
Basic rate£14,668-£25,29620%
Intermediate rate£25,297-£43,66221%
Higher rate£43,663-£150,00041%
Top rateMore than £150,00046%

According to Scottish Budget documents, those who earn less than £27,939 - which accounts for 54% of Scottish taxpayers - will pay less income tax in 2021-22 than if they lived in the rest of the UK.

Income tax in Wales

Income tax in Wales has been devolved since 6 April 2019, but the rates and thresholds have so far remained the same as in England and Northern Ireland.

Tax bandIncomeTax rate
Basic rate£12,570-£50,27020%
Higher rate£50,271-£150,00040%
Additional rateMore than £150,00045%

Listen:our experts discuss the Budget on the Which? Money Podcast.

National Insurance rates in 2021-22

Like income tax, National Insurances thresholds are also due to increase by 0.5% in line with CPI inflation, but rates will stay the same. This means employed workers can earn £68 more in 2021-22 before NI payments kick in.

The government has been gradually increasing the Class 1 National Insurance threshold over the past few years, with an aim to eventually bring it up to match the personal allowance.

The table below shows the rates and thresholds for employed workers in 2021-22 compared with 2020-21.

Employed 2020-21Employed 2021-22
How much you earnClass 1 rateHow much you earnClass 1 rate
Less than £9,5000%Less than £9,5680%
More than £50,0002%More than £50,2702%

Self-employed National Insurance in 2021-22

Class 2 weekly contributions have been frozen at the 2020-21 rate, which is good news for self-employed workers.

The increased payment thresholds also mean you can take home more of your profits before paying NI.

Self-employed 2020-21Self-employed 2021-22
How much you earnClass 2 and Class 4 ratesHow much you earnClass 2 and Class 4 rates
Less than £6,4750%Less than £6,5150%
£6,475-£9,500£3.05 per week (Class 2 only)£6,515-£9,568£3.05 per week (Class 2 only)
£9,500-£50,0009% + £3.05 per week£9,568-£50,2709% + £3.05 per week
More than £50,0002% + £3.05 per weekMore than £50,2702% + £3.05 per week

The graph below shows how Class 2 and Class 4 thresholds have changed over the past few years.

Class 3 contributions

Class 3 contributions are usually paid voluntarily by those with gaps in their National Insurance contributions (NICs).

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

The table below shows how much you'll pay from April 2021.

Unemployed/exempt 2020-21Unemployed/exempt 2021-22
Type of contributionsClass 3 voluntary contributionsType of contributionsClass 3 voluntary contributions
Amount£15.30 per weekAmount£15.40 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 £2,460 for Class 1 National Insurance in 2020-21.

In 2021-22, they'll have to pay £2,452.

For a self-employed worker with profits of £20,000, they would have had to pay £1,103.60 in 2020-21 through a mix of Class 2 and Class 4 contributions, but in 2021-22 they will pay £1,097.

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.