National insurance contributions increased

There is to be a headline increase in the rate of NIC of 0.5% which will impact on every employee, employer and self employed individual from its introduction in 2011/12. Changes to NIC thresholds applying from 6 April 2009 will see real incomes fall by around £385 per year for those earning in excess of £44,000 a year.

Baker Tilly analysis

The Chancellor clearly intends to use NIC changes to 'claw back' his earlier tax reductions The NIC increase will come into effect on 6 April 2011, when the employed, self employed and Employers will see a rise of 0.5% to 11.5%, 8.5% and 13.3% respectively. The additional NIC charge on earnings above the upper threshold will also be increased by 0.5% taking the rate to 1.5%.

The changes announced to NIC thresholds that apply from 6 April 2009 will immediately collect more from higher earners (anyone earning over around £44,000) and everyone will face higher NIC costs in 2011/12.

In detail

When the 10 pence tax compensation package was introduced in 2008/09 it brought to an end, at least temporarily, the process of aligning the tax and NIC thresholds and bands. The Chancellor's immediate concern then was to get additional money into employees' hands (the self employed mostly will not see the benefit of the increase in their personal allowances until they file their 2008/09 tax returns and their balancing payments, due by 31 January 2010, are assessed.

The Chancellor is not immediately reinstating the alignment process; only the upper earnings limit will be aligned again as from 6 April 2009 so that the upper limit for employees' main rate Class 1 NIC will be equal to the personal allowance plus basic rate band, so that additional rate Class 1 contributions will effectively start at the same point as higher rates of income tax.

In 2009/10 the NIC threshold will be lower than the income tax personal allowance and the thresholds will only be aligned as from 6 April 2011.

greatest change in NIC has been reserved until 2011/12 when NICs will be increased by 0.5%. That is an increase to both employers' and employees' NICs or an extra 1% on earnings between the lower and upper earnings limits and then 0.5% on employers' NICs above the threshold.

changes to NIC rates will be:

• employees' main Class 1 rate up from 11% to 11.5%
• employees' additional Class 1 rate on earning above the upper earnings limit up from 1% to 1.5%
• employers' Class 1, 1A and 1B rates up from 12.8% to 13.3%
• self-employed main Class 4 rate up from 8% to 8.5%
• employed additional Class 4 rate up from 1% to 1.5%

The picture is further complicated by the tax credit system which provides additional support for those on lower incomes. The complexity of the interaction between tax credits, income tax and NICs was a major contributor to the 10 pence tax débacle when it became clear that tax credits would not make up the loss caused to lower earners by their increased tax burden. The Chancellor has announced no measures to address the continuing problems of this complex interaction.