How will the rise in national insurance affect you?

The pain of the rise in national insurance will be felt by people on their next payday, as they try to juggle surging living costs on a shrunken wage packet, experts have warned.

Here is a look at why the increase is happening and why “awful April” is seen as just the start of a string of tough months ahead:

– Why has the increase been introduced?

The Government says the 1.25 percentage point rise in national insurance (NI) will be spent on the NHS, health and social care in the UK.

From April 2023, the NI rate will return to the 2021-22 level, as a new health and social care levy introduced.

The tax rise could raise £39 billion over the next three years, helping to reduce NHS backlogs which have been exacerbated by the coronavirus crisis.

The extra cash raised could reduce waiting times and deliver millions more scans, tests and operations.

– Who does it apply to and how will the increase be taken?

If you are employed, this will come out of your wages before you are paid and the contributions will show in your payslip. Self-employed people pay national insurance depending on their profits and employers also pay NI contributions.

– How else are households being squeezed?

This month has been dubbed “awful April” by some, as households are dealing with multiple pressures from soaring living costs.

The NI rise comes on top of a 54% increase to Ofgem’s price cap and increases to council tax and water bills, mortgages, rents, food and transport costs.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, said: “Awful April is just the beginning of an incredibly tough few months…

“The real pain of the national insurance hike will be felt on payday, at the end of the month.

“At that point, we’ll be reeling from the impact of higher energy bills, council tax, water bills, fuel costs – and we’ll have to manage it all on a smaller pay packet. It’s a terrible time to hike taxes.”

– Why will people particularly feel the pinch from the NI change in the next few months?

Employees currently pay national insurance on annual earnings above £9,880, but from July the threshold will increase to £12,570.

Ms Coles said the rise in the NI threshold will help combat the cost of the increase for lower and average earners.

But she said: “It doesn’t actually affect pay packets until the end of July.”

She continued: “In the intervening months, the threshold will be just £9,880, and the 1.25 percentage point rise will leave someone earning £20,000 paying £130 more a year, someone on £30,000 will pay £255 more, and someone earning £50,000 will pay £505 more a year.

“And while 1.25 percentage points doesn’t sound like much of an uplift, in reality it will mean someone on an average wage will pay 10% more.”

– Is there anything people can do to combat the impacts of the NI hike?

Salary sacrifice schemes allow employers to reduce an employee’s salary and pay the equivalent amount into a non-cash benefit, such as pension contributions or a cycle-to-work scheme.

Adrian Lowery, personal finance expert at investing platform Bestinvest, said: “An employer could agree to contribute a greater proportion of your salary into your workplace pension, in lieu of pay.

“While pension contributions always benefit from income tax relief, if this system is used then national insurance relief is also obtained.”

He said there are downsides, however, to reducing your salary, such as decreased mortgage affordability.

Myron Jobson, senior personal finance analyst at interactive investor, warned: “A lower salary can affect entitlements such as maternity/paternity pay, mortgage applications based on one’s income, and some state allowances.

“As such, people should always consider how such benefits could impact their finances more broadly.”