Policy paper

National Insurance: Increase to Primary Threshold and the Lower Profits Limit and reduction in Class 2 liability of those earning between the Small Profits Threshold and Lower Profits Limit

Published 23 March 2022

Who is likely to be affected

Employed and self-employed people who have a National Insurance Contributions (NICs) liability.

General description of the measure

This measure will increase the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs from 6 July 2022, aligning them with the personal allowance for income tax which is set at £12,570 per annum. These thresholds will remain aligned.

From April 2022, this measure also reduces Class 2 NICs liabilities to nil on profits between the Small Profits Threshold (SPT) and LPL. This will ensure that no one earning between the SPT and LPL will pay any Class 2 NICs, while allowing individuals to be able to continue to build up National Insurance credits.

Background to the measure

The Government has an ultimate ambition to align the NICs starting thresholds with the income tax personal allowance. For the 2020-21 tax year the PT and LPL were raised by over £800 to £9,500, representing a tax cut for 31 million workers. For 2021-22, the PT and LPL were increased by CPI to £9,568. The current legislated position for 2022-23 is a further increase by CPI to £9,880 from April.

At Spring Statement 2022 the government has announced that it will meet this ambition by aligning the starting thresholds from July 2022 and, alongside this, from April 2022, self-employed individuals with profits between the SPT and LPL will continue to be able to build up National Insurance credits but will not pay any Class 2 NICs.

Detailed proposal

Operative date

In the case of the PT, it is intended that the measure will have effect from 6 July 2022. In the case of the LPL, because self-employed NICs are calculated on an annual basis, the measure will apply from the start of the 2022-23 tax year, but with an annualised threshold, so the effect is equivalent across the tax year to those who are employed and paid on a weekly or monthly basis. This means the LPL will be £11,908 for the 2022-23 tax year which is equivalent to 13 weeks of the threshold at £9,880 and 39 weeks at £12,570, reflecting the position for employees ^{[footnote 1]}.

Changes to Class 2 NICs will start from the beginning of the 2022-23 tax year, reflecting the annualised basis of the thresholds underpinning Class 2 NICs.

Current law

The weekly PT can be set for a tax year using powers in section 5(1) Social Security Contributions and Benefits Act 1992 (SSCBA) and its Northern Ireland equivalent. The monthly and yearly equivalents of the PT are set out in regulation 11(3)(a) and (3)(b) of the Social Security (Contributions) Regulations 2001 (SSCR). The annual LPL can be set for each tax year by using powers in section 141(4) Social Security Administration Act 1992 (SSAA) and its Northern Ireland equivalent.

The PT and LPL are currently set at £9,880 for the tax year 2022-23.

Existing Class 2 NICs thresholds can be set by using powers in section 141(4) SSAA and its Northern Ireland equivalent. Class 2 NICs are set at a flat rate of £3.15 per week in 2022-23.

Proposed revisions

Primary legislation will be introduced in due course that amends section 15(3), 18(1) and (1A) SSCBA and its Northern Ireland equivalent, and regulations 8, 10, 11 and 21 of the SSCR to set the PT and LPL at the equivalent of £12,570 per annum from 6 July 2022 to align with the income tax personal allowance.

The legislation will also provide a power for HM Treasury to lay regulations to ensure that the threshold for paying Class 2 NICs is equivalent to the LPL, but that the regulations may treat individuals whose profits are between the SPT and LPL as having made Class 2 contributions.

Summary of impacts

Exchequer impact (£m)

	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
Increase the PT and LPL from July 2022	0	-6250	-5960	-4855	-4330	-4495
Remove Class 2 NICs liabilities between the SPT and LPL from April 2022	0	-65	-100	-100	-95	-95

These figures are set out in Table 3.1 of Spring Statement 2022.

The costing for the increase in the annual PT and LPL was certified by the Office for Budget Responsibility (OBR). The costing for Class 2 NICs will be certified at the next fiscal event.

More details can be found in the policy costings document published alongside Spring Statement 2022.

Economic impact

The OBR have incorporated the impact of the PT/LPL measure in their economy forecast to account for the temporary impact on consumption from this measure. More details can be found in their March 2022 Economic and Fiscal Outlook.

The measure is anticipated to have a positive impact on earnings. It will also act to support labour supply by increasing the return to work, particularly for low earners. These effects on their own are not expected to generate a significant macroeconomic impact in the long-run.

Small adjustments are made to take account of behavioural responses, including individuals increasing their taxable income in response to the threshold increase and changes to future incorporations.

The terms used in this section are defined in line with the OBR’s indirect effects process. This will apply where, for example, a measure affects inflation or growth.

Impact on individuals, households and families

This measure will have a positive impact on individuals, households and families across the United Kingdom by increasing the point at which employees and the self-employed start paying NICs. Almost 30 million individuals will benefit from this measure. From July, around 70% of NICs payers will pay less NICs, even after accounting for the introduction of the Health and Social Care Levy.

The change to Class 2 NICs will provide a tax cut for around 500,000 self-employed people worth up to £165 per year. Actual gains for individuals will vary according to their circumstances.

There is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

It is not expected that there will be disproportionate impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have an impact on over 1.6 million employers who will be required to introduce this change in their payroll software. One-off costs will include familiarisation with the change and will also include updating payroll software or systems to reflect the change. Customer experience is expected to remain broadly the same as this measure does not significantly alter how employers interact with HMRC. This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

HMRC anticipates some increases in call volumes from customers as a result of implementing this change. The initial assessment does not suggest there will be significant delivery costs in implementing this policy. HMRC will continue to undertake and refine its operational impacting. It is anticipated that further IT changes may be identified and required to be delivered at additional cost to HMRC, to support safe delivery of this policy.

Other impacts

No other impacts have been identified.

Monitoring and evaluation

The measure will be kept under review and monitored through information collected from NICs receipts.

Further advice

If you have any questions about this change, contact HMRC at: nics.correspondence@hmrc.gov.uk.

Declaration

The Rt Hon Lucy Frazer QC MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.

1. The £11,908 figure is derived from the pre-July weekly Primary Threshold of £190 and the new, post-July threshold of £242. ↩