An overview of the Tax and NIC thresholds for 2021-22 in the UK

Usually, an Autumn Budget outlining the necessary details the following year would get delivered by the chancellor stating the rates and thresholds for National Insurance Contributions (NIC). Still, due to the pandemic spread worldwide, this did not happen in 2020. There was a lot of confusion in people’s minds regarding the increment or decrement of the thresholds. To clear this up, Jesse Norman, the financial secretary to the Treasury, confirmed that the NIC thresholds would increase for the upcoming year 2021-22. He confirmed in a written ministerial statement deposited in the House of Commons Library on December 16, 2020. Let us get an in-depth look at the revisions in the relevant thresholds for the coming financial year.

A Brief on the National Insurance Contributions

National Insurance Contributions, aka NIC, are the taxes that British employees and employers need to pay to the HM Revenue and Customs (HMRC) in the UK. These contributions are not made manually, but they operate through payroll deductions. The amount payable as NIC varies with the amount you earn during the given period. Based on this, there are “classes” that represent the type of NIC that you pay. Your class of NIC is based on your employment status.

For the calculation of NIC, your pay gets compared to various ‘limits’ such as

  1. Lower Earning Limit (LEL)
  2. Primary Earnings Threshold
  3. Secondary Earnings Threshold
  4. Upper Earnings Limit
  5. Lower Earnings Limit

Class 1

Class 1 NIC thresholds for the year 2021/22 in comparison with that for the year 2020/21:

NIC Threshold 2021/22 2020/21
Lower Earning Limit (LEL) £120 per week £520 per month £6,240 per year   £120 per week £520 per month £6,240 per year
Primary Threshold (PT) £184 per week £797 per month £9,568 per year £183 per week £792 per month £9,500 per year  
Secondary Threshold (ST) £184 per week £797 per month £9,568 per year   £183 per week £792 per month £9,500 per year  
Upper Earnings Limit £967 per week £4,189 per month £50,270 per year   £962 per week £4,167 per month £50,000 per year
Check which category applies to you

A)   Lower Earning Limit (LEL)

If your payment is between the LEL and the PT, you will get National Insurance’ credits’. This provision means that you will get some basic National Insurance benefits but won’t pay any National Insurance. The LEL limit for 2020/21 is £120 per week.

B)  Primary Threshold (or Primary Earnings Threshold)

Anyone who earns above the Primary Threshold and below the Upper Earnings Limit pays the standard rate of National Insurance (12% in 2020/21). As mentioned in the above table, The Primary Threshold is £184 per week in 2020/21.

C)   Secondary Threshold (or Secondary Earnings Threshold)

If your earnings go beyond the Secondary Earnings Threshold, your employer is entitled to pay the employer’s National Insurance’s standard rate on these earnings (13.8% in 2020/21). This is in addition to the employee’s contribution; the employer pays 13.8% of the earned money as NIC. This limit is £170 per week for the financial year 2020-21.

D)    The Upper Earnings Limit (or UEL)

For an employee who earns above the limit of £967 per week, the NIC rates fall by 2%. One must note that the employer continues to pay 13.8% on this money.

What if I earn less than £120 per week?

For anybody making less than £120 per week, there is neither is there a provision for National Insurance benefits nor are they entitled to pay the NIC.

Class 2

This type or class of NIC is for those who are self-employed. An individual who is self-employed and earns an annual profit of more than the small profit threshold (SPT) is required to pay NIC.

This limit (SPT) has also been increased from £6,475 to £6,515 per annum, while the weekly rate is still £3.05 per week

Class 3

Class 3 NIC is a payment made by individuals who want to avail retirement pensions and other such benefits. The amount is made voluntarily, and the weekly charges for 2021/22 are £15.40. This class can also be used to fix any gaps that exist in one’s NIC records. If a person finds any such gaps in their NIC records, they can check their eligibility and pay voluntary charges to get rid of them.

Class 4

Class 4 NIC is payable by the self-employed individuals who make profits higher than the lower profits limit (LPL). For the fiscal year 2021-22, there is an increase in LPL from  £9,500 to £9,568 per annum.  

Other Essential taxes and thresholds to Consider

1. Personal allowance and basic rate

The 2020 spending review stated that the government would increase the 2021/22 income tax personal allowance and HRT following the 0.5% September CPI figure. This fact implies that the personal allowance is expected to surge from £12,500 to £12,570. The basic rate threshold for 2021/22 might be £37,700.

2. Income tax

For the year 2021/22, the class 1 UEL is increased from 50,000 to £50,270 per annum. For English, Welsh, and Northern Ireland resident taxpayers, the HRT will be £50,270 because the

UEL has been aligned with the income tax higher rate threshold (HRT).

3. Parental Pay Payments

The commencement of the new tax year also brings changes in parental pay payments. Parental payments will increase from £151.20 to £151.97. Unlike SSP, parental payments will be applicable from the week that marks the first Sunday of April, which in this case shall be April 4, 2021.

4. Pensions

The Lower Earning Limit for the tax year 2021/22 is the same as for 2020/21 – £120 per week. It implies that the lower qualifying earnings band for pensions will remain unchanged. You can check out the necessary details published by the HMRC.

5. Statutory Sick Pay (SSP)

SSP weekly rates will increase from £95.85 to £96.35. This applies to average weekly earnings (AWE) at or above the LEL. The new tax year will commence on April 6, 2021. Thus the modified rate of SSP will be applicable with the commencement of the new tax year.

Unrounded daily rates Number of QDs/week Number of due days
    1 2 3 4 5 6 7
£13.7643 7 £13.77 £27.53 £41.30 £55.06 £68.83 £82.59 £96.35
£16.0583 6 £16.06 £32.12 £48.18 £64.23 £80.30 £96.35  
£19.2700 5 £19.27 £38.54 £57.81 £77.08 £96.35    
£24.0875 4 £24.09 £48.18 £72.27 £96.35      
£32.1167 3 £32.12 £64.24 £96.35        
£48.1750 2 £48.18 £96.35          
£96.3500 1              

What You Should Know:

Looking at these changed thresholds for tax and NIC contributions, it is time for all professionals to make the necessary alterations in their work process and communicate to their clients about the impact of these revisions. The taxpayers across the UK and Northern Ireland should consider these updates for the coming year. One should especially keep an eye on the NIC rates and limits available as per The Social Security Contributions Regulations 2021.

 

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