The complexities of National Insurance (NI) and income tax in the United Kingdom remain a significant concern for many workers and employers. An announcement made recently revealed an increase in National Insurance payments mandated for employers. Prior to the budget release, the Chancellor and Prime Minister had pledged that neither income tax rates nor National Insurance rates for working individuals would see an increase, and this promise has been kept—at least for the time being.
In 2024, both employees and the self-employed had already begun experiencing reduced National Insurance rates; however, adjustments made to the tax calculation methods have ultimately led to an increase in the overall amount that many pay. The government typically utilizes National Insurance contributions (NICs) primarily to fund various benefits and to support the National Health Service (NHS). Every employee, employer, and self-employed individual across the UK is required to pay NI, with the notable exception of those over the state pension age who do not pay NI even if they continue to work. Importantly, the contributions made throughout one’s career are essential for qualifying for certain benefits, including the state pension.
As for the specifics regarding employer obligations, at present, businesses are responsible for paying a rate of 13.8% on earnings of employees above a threshold of £9,100 annually. In the recent budget, Chancellor Rachel Reeves indicated that this employer contribution rate would rise to 15% in April 2025, while the threshold would drop to £5,000. To offset some of these costs, the employment allowance—which assists companies in reducing their NI liabilities—will increase from £5,000 to £10,500. Collectively, these changes are anticipated to generate approximately £25 billion annually by the end of the fiscal period encompassed by the budget. Notably, NI payments are not applicable on pension contributions, which had been a topic of speculation prior to the budget but ultimately did not change.
Maintaining a focus on employee contributions, it is worth noting that individuals can expect to begin NI payments once they reach 16 years of age, provided they earn more than £242 weekly or have self-employed profits exceeding £12,570 per year. The starting rate for NI was adjusted downwards in 2024 from 12% to 10% and then subsequently to 8%. This reduction, under the previous Conservative government, was deemed beneficial as it positioned the average worker earning £35,000 to save around £900 annually in National Insurance.
For self-employed individuals, the Class 4 NI contributions—applicable on earnings between £12,570 and £50,270—were reduced from 9% to 6%. The former government touted this as a notable benefit worth around £350 for a self-employed person with an earnings benchmark of £28,200. Additionally, self-employed workers are no longer required to pay Class 2 contributions. The NI rate for income and profits surpassing £50,270 remains at 2% for all workers.
Alongside NI, income tax also plays a considerable role in the taxation landscape of the UK. It is assessed on earnings from employment, self-employment profits, and certain benefits and pensions, with the standard tax year running from April 6 to April 5 the following year. The basic income tax rate stands at 20%, affecting annual earnings between £12,571 and £50,270. For higher income brackets, a rate of 40% is applied to earnings from £50,271 to £125,140. There is also an additional rate of 45% imposed on earnings exceeding £125,140 annually.
The freezing of certain thresholds by the previous government means that, despite the National Insurance cuts, many individuals will still face heightened overall tax burdens as their salaries rise. Per the Institute for Fiscal Studies (IFS), this freeze effectively negates some of the benefits derived from the NI reductions. In the current tax climate, the changes vary significantly across different income levels and affect many households, leading to a broad spectrum of financial implications depending on an individual’s earnings or business income.
Comparatively, when looking at UK taxes against other countries, the overall tax burden concerning gross domestic product (GDP) placed the UK in the center of the G7 nations, with 35.3% in 2022. Nonetheless, there are indications that overall taxation in the UK is higher relative to historical norms, with projections suggesting it may reach the highest rate in 80 years by 2028-29, highlighting an ongoing and nuanced discussion around taxation policy, economic growth, and fiscal responsibility in the UK’s context.
