TaxationWeb's Lee Sharpe dismantles the former Chancellor's claims to save NICs for workers and warns that much of any claimed saving will soon evaporate in the years to come.
Introduction
The former Chancellor's 2022 Spring Statement on 23 March 2022 included the following claim:
"Our current plan is to increase the NICs threshold this year by £300. I’m not going to do that. I’m going to increase it by the full £3,000. Delivering our promise to fully equalise the NICs and Income Tax thresholds. And not incrementally over many years, but in one go, this year.
From this July, people will be able to earn £12,570 a year without paying a single penny of Income Tax or National Insurance.
That’s a £6 billion personal tax cut for 30 million people across the United Kingdom.
A tax cut for employees worth over £330 a year." (Emphasis added).
The Chancellor has since doubled down on this claim, as our Twitter feed had this nugget, and a glossy video, courtesy of HM Treasury:
"We all take responsibility for the results and I’m determined to continue working to tackle the cost of living, including delivering NICs changes saving 30 million people on average £330."
Mechanically, this is questionable. In broad strokes, even HM Treasury's own figures suggest the claim is... doubtful. I shall explain why, in the next few paragraphs. Perhaps most important, is what the former Chancellor chose to omit - note that we are some way past the 2021 Budget, which the then Chancellor promised to be "unpopular but honest". No such claim was made for the 2022 Spring Statement, whose NIC changes will take effect from 6 July 2022.
Basic Maths
Firstly, let's look at the basic claim of a saving of £6billion a year, for 30million people. The figures come from the first row of the Table 3.1 on page 27 of the Spring Statement itself, which says that the saving will be £6.25billion in 2022/23. This sounds impressive, until you divide £6.25billion by 30million people and end up with £208 - a figure which is significantly lower than £330, but more credible.
But that does not tell the story in detail. For that, we have to go back to Budget 2011...
Budget 2011
The Budget 2011 Speech included the following commitment from the government:
"...from April 2012 the default indexation assumption for direct taxes will move to CPI. There will be protection through this Parliament for those eligible for age-related, married couple and blind person’s [sic] allowances, and for Employers’ National Insurance Contributions."
In other words, the level of earnings at which employees should start to pay primary Class 1 NICs is supposed to be increased annually, based on the Consumer Price Index (CPI).
Thus, like state benefits, (when the Chancellor of the day isn't feeling too stingy), and like the Income Tax Personal Allowance, (sometimes), the Class 1 NIC Primary Threshold has typically been uprated annually based on the previous September's 12-month CPI figure. The government is not bound to do so, although the powers are contained in SSCBA 1992 s 5, and have been largely observed and duly updated by regulation in accordance with SI 2001/1004 Reg.10.
Hence the admission in this year's Spring Statement that "the current plan" had been to increase the Primary Threshold by (roughly) £300 from £9,568 to £9,880, in line with September 2021's annual CPI. This would automatically have saved employees around £37 in 2022/23, all other things being equal - which of course they weren't.
Health and Social Care Levy (September 2021)
On 7 September 2021, the Chancellor announced a new Health and Social Care Levy (HSCL), that would be based on the NICs regime. In fact, while it will ultimately stand on its own legislative feet, it is for 2022/3 being bolted on to NICs themselves: +1.25% to Employees' Primary Contributions; also to Employers' Secondary Contributions (and to self-employed Class 4 NICs, and to the dividend Ordinary, Upper and Additional Rates).
Of course this is the most significant change to NICs for 2022/23. As we set out in the table below, this will cost higher earners more, as the increase applies as soon as the Primary Threshold is breached, with no upper limit.
Spring Statement (23 March 2022)
The Chancellor then announced that the Primary Threshold for Employees would be increased pro rata for the last 9 tax months (i.e., 75%) of the 2022/23 tax year, equivalent to the Income Tax Personal Allowance of £12,570. For those earning on an annual basis (such as directors), the annualised equivalent is £11,908. A similar change will apply for the self-employed, paying Class 4 NICs. The saving in 2022/23 attributable solely to the Spring Statement changes is a maximum of £269.
Table Summarising Changes
The following table shows regularly-paid employees what to expect, for various levels of annual salary.
|
|
2021/22 |
2022/23: Progressive Changes |
|
|||||
|
Annual Salary |
2021/22 NICs |
Adj. for Annual CPI Increase £9,880 |
Change |
THEN Adjust for Health & Social Care Levy (HSCL) |
Change |
Annual CPI + Health Levy + Spring Statement |
Change |
Am I Better or Worse off for NICs in 2022/23? |
|
£ |
£ |
£ |
£ |
£ |
£ |
£ |
£ |
£ |
|
10,000 |
52 |
14 |
(37) |
16 |
2 |
- |
(16) |
52 |
|
12,500 |
352 |
314 |
(37) |
347 |
33 |
78 |
(269) |
273 |
|
15,000 |
652 |
614 |
(37) |
678 |
64 |
410 |
(269) |
242 |
|
17,500 |
952 |
914 |
(37) |
1,010 |
95 |
741 |
(269) |
211 |
|
20,000 |
1,252 |
1,214 |
(37) |
1,341 |
127 |
1,072 |
(269) |
180 |
|
22,500 |
1,552 |
1,514 |
(37) |
1,672 |
158 |
1,403 |
(269) |
148 |
|
25,000 |
1,852 |
1,814 |
(37) |
2,003 |
189 |
1,735 |
(269) |
117 |
|
27,500 |
2,152 |
2,114 |
(37) |
2,335 |
220 |
2,066 |
(269) |
86 |
|
30,000 |
2,452 |
2,414 |
(37) |
2,666 |
252 |
2,397 |
(269) |
55 |
|
32,500 |
2,752 |
2,714 |
(37) |
2,997 |
283 |
2,728 |
(269) |
23 |
|
35,000 |
3,052 |
3,014 |
(37) |
3,328 |
314 |
3,060 |
(269) |
(8) |
|
37,500 |
3,352 |
3,314 |
(37) |
3,660 |
345 |
3,391 |
(269) |
(39) |
|
40,000 |
3,652 |
3,614 |
(37) |
3,991 |
377 |
3,722 |
(269) |
(70) |
|
45,000 |
4,252 |
4,214 |
(37) |
4,653 |
439 |
4,385 |
(269) |
(133) |
|
50,000 |
4,852 |
4,814 |
(37) |
5,316 |
502 |
5,047 |
(269) |
(195) |
|
55,000 |
4,979 |
4,941 |
(37) |
5,505 |
564 |
5,237 |
(269) |
(258) |
|
60,000 |
5,079 |
5,041 |
(37) |
5,668 |
627 |
5,399 |
(269) |
(320) |
|
70,000 |
5,279 |
5,241 |
(37) |
5,993 |
752 |
5,724 |
(269) |
(445) |
|
80,000 |
5,479 |
5,441 |
(37) |
6,318 |
877 |
6,049 |
(269) |
(570) |
Note:
- NICs as calculated are based on the standard "Table A" rates
- Saving from increasing Primary Threshold from £9,568 to £9,880 is £37, across the board
- Savng from increasing Primary Threshold from £9,880 to £12,570 on an annualised basis from July 2022 is £269, pretty much across the board
- Strictly, the Health and Social Care Levy is not "the same as" the temporary hike in NICs but the hike for 2022/23 has been shoe-horned in to start taking money while the legislation for the Levy proper is being drafted, etc., so - again - referred to as HSCL for simplicity
- The "Am I Better or Worse Off..." figures for 2022/23 show the cumulative position for all NIC/HSCL changes in the year: better off where positive, but worse off once negative (i.e., in brackets)
- These figures will broadly "stand up" where the employee is earning a regular amount - weekly, monthly, etc. Where earnings fluctuate, then there will be some variation in overall outcome - earning little, before 5 July 2022, is broadly "worse".
Based on the figures in some of the news items published on the Internet, some practitioners may be surprised to find that:
- As should be clear from the original guidance and indeed the NIC(IT)A 2022 s 1(4), anyone who is being paid, weekly or monthly, from the tax months of July 2022 onwards will from then on benefit from a week's worth / month's worth of the new Primary Threshold of £12,570 every payroll run but without regard to anything earned in the first 3 months - those earlier months will suffer more NICs, based on the 'original' £9,880 Primary Threshold, and that is effectively 'locked in'. This is of course standard fayre for NICs, (other than for directors, who are paid on a cumulative and annual basis) and one of the reasons why changing the thresholds part-way through a tax year smacks of desperation, rather than careful strategy.
- As explained with quite detailed calculations in our 2022 Spring Statement review, the point at which the Health and Social Care Levy-based NICs hike outweighs the saving from the Spring Statement is around £31,000 (it may seem slightly higher from the above table but that is because the final overall position also includes the automatic CPI uprating to £9,880, for simplicity).
So Much for Saving 330 Quid a Year!
There will be those who will suggest that this article is being disingenuous by looking only up to the end of 2022/23, rather than trying to bolt on the first 3 months of 2023/24, since the savings have only applied for 9 months, rather than a full year. And it is theoretically possible to achieve savings of £330, in the twelve months to 5 July 2023. However:
- "Maximum" is not the same as "average".
- I have never seen anyone before this year's Spring Statement try to devise an "NIC year" running to July.
- What is perhaps more disingenuous is to 'ignore' the impact of the NICs masquerading as Health and Social Care Levy, in 2022/23
- Nor I do not think it is fair to give the Chancellor credit for the rampant inflation we are currently experiencing
To expand on that last point, September 2022's annual CPI figure will likely be around 10%, meaning in turn that the Primary Threshold would likely have risen to almost £11,000 from 6 April 2023 even if the Chancellor had done nothing to NICs in his Spring Statement. Which leads me to a more concerning issue for the years to come - why this will not be an annual saving.
Frozen!
In his last Budget, in 2021, the Chancellor admitted that freezing Income Tax thresholds up to and including 2025/26 - including the Personal Allowance - would be "unpopular but honest". This was because he was not hiding the fact that keeping the thresholds the same, while inflation was pushing up earnings, meant that more people would be paying more tax. But it is implicit in the Spring Statement 2022, only a few months later, that the 'new' NICs Primary Threshold will also be pegged to the Personal Allowance from now on, therefore also frozen at £12,570pa 'til 2025/26 at the earliest. All the Chancellor has really done is to bring forwards the date of alignment a little. Meanwhile, the new Health and Social Care Levy will run and run.
Basic Maths - Again
The corresponding Tax Information and Impact Note published on 23 March 2022 is interesting: it suggests that the forecast saving of £6.25billion for 2022/23 should be distributed amongst 31million workers, costing the Exchequer (and therefore saving those workers) an average of £201 in 2022/23. Here's the kicker: the projections in the TIIN never exceed that savings figure. If 31million people were genuinely expected to be saving £330 a year on average, then that must cost the Exchequer c£10.2billion a year at some point - basically an extra £4billion a year over the £6.25billion slated - but the figures never get anywhere near that, and in fact they fall below £6billion after 2022/23.
Now, we have had a great many reasons in the past to question HMRC's proficiency with a calculator - such as managing to 'lose' a mere £320million in one of it's TIINs for last year's Budget but I think even HMRC would baulk at misplacing £4billion. I am, in this case, more inclined to trust HMRC than I am a politician. And yet...
Still Unpopular but Honest?
I have previously said that aligning he NICs starting or Primary Threshold with the Income Tax Personal Allowance, (likewise for the self-employed), is a welcome but strangely-timed development. Payroll bureaux and software companies will not have had much time to prepare, to put it mildly.
When the former Chancellor announced the NICs threshold increase in March 2022, he will have been acutely aware of the consequences of the Health and Social Care Levy, and how expensive that would be (and still will be, for higher earners) starting this tax year. The figures in the table above speak for themselves: the last-minute increase to the starting point for NICs will draw the sting of the new Health and Social Care Levy for lower earners, but not for those around / above median salaries, who stand to pay quite a bit more. Employers paying secondary contributions get nothing out of this - which may mean employees in turn suffer indirectly (e.g., lower wage rises)
The former Chancellor would also have known that annual CPI inflation was already north of 6% by February 2022, and climbing. While I am no economist, I don't think it is credible that CPI will miraculously plummet next year to a comfortable 2% or 3%pa. If it hits c10% this year as projected, and then lingers around 5% in 2023/24, then we should soon have been within touching distance of a Primary Threshold of £12,000 by 2025/26 due simply to the annual uprating in accordance with CPI, as is (was) tradition.
In other words, the Primary Threshold might well have made it to alignment at £12,570 or thereabouts under its own steam, while the Income Tax Personal Allowance is being held there at least until 2025/26, as noted above. Getting there earlier is better for taxpayers, but not, I would suggest, worth all the fanfare it has received to date. Meanwhile, HMRC's TIIN predicts that the former Chancellor's largesse will still be costing the Exchequer - and therefore saving workers - c£4.5billion a year by 2026/27?
Calculated Measures
I will end by noting that, despite seemingly struggling to meet its service level commitments, HMRC has found time to set up a calculator that estimates how the changes to NICs will affect employees for the 12 months to 5 July 2023. Such a strange choice of dates for comparison seems aimed specifically to counter criticism of the "over £330 annual saving a year" claim. Which is a fine but presumably quite short-lived use of HMRC's increasingly limited resources. Except that, by crossing three tax years 2021/22 - 2023/24, it implicitly includes two default CPI increases in Primary Threshold - and it would have to include more, if it really wanted to say it was saving "£330 a year".
I doubt even the former Chancellor knows what the CPI will be in September 2022, let alone in future years. So, little basis for being able to claim those increases as part of his Spring Statement 2022 tax cut, I think. Unless, perhaps, he wants also to take credit for abolishing the default CPI uplift in place since 2011..? Of course it is easy to make claim and counterclaim before the process has begun; let's see if, in roughly 9 months' time, employees feel like theyr'e saving £330 in NICs a year, on average.
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