With the general election coming ever nearer, the major political parties of the UK have begun coming out with their manifestos and publishing their tax policies. The two major parties – the Conservative Party and the Labour Party – have both pledged not to raise the Income Tax, VAT and National Insurance (NI).
However, the public may still experience some changes after the election. Here, we will discuss all the previous rates, the upcoming changes, and how they can affect you in the future.
What is National Insurance and Why Do You Pay It?
National Insurance Contributions (NICs), also referred to as National Insurance (NI), help fund the National Health Service (NHS) of the UK. Also, paying NI is required to qualify for the State Pension and certain other benefits.
You will be eligible for different types of State Pension based on the various class distributions of your income.
Pay (per week)/ Profits (per annum) | Rates from 6 April 2024 to 5 April 2025 | |
|---|---|---|
Class 1 (Employed) | Pay between £242 to £967 Pay over £967 | 8% 2% |
Class 2 (Voluntary Contributions) | £3.45 | |
Class 3 (Voluntary Contributions) | £17.45 | |
Class 4 (Self-employed) | Profits between £12,570 to £50,270 Profits over £50,270 | 6% 2% |
The NI rates apply across the UK for people who are:
- Over the age of 16
- An employee earning more than £242 per week
- Self-employed with a profit of more than £12,570 per annum
However, if you are an employee earning between £123 and £242 a week, or a self-employed individual making an annual profit of £6,725 to £12,570, you do not have to pay National Insurance and can still be eligible for the State Pension and other benefits.
Also, if you do not work because you are a caregiver or claim certain benefits, you will receive National Insurance credits instead. This will make you eligible for the relevant benefits.
What Are the National Insurance Changes for 2024?
The next general election is scheduled to be held on 4 July 2024. The current government of the Conservatives has already introduced two 2p changes to the NI that came into effect from 6 April 2024. In the 2023 Autumn statement, the Conservative government cut the Class 1 NI rates from 12% to 10% and Class 4 rates from 9% to 8%. Similarly, in the 2024 Spring Budget, the Class 1 NI rates were further cut from 10% to 8% and Class 4 rates from 8% to 6%.
Additionally, the Conservatives have promised a further 2p reduction if re-elected. Prime Minister Rishi Sunak has promised to reduce NI rates by 1p next April, 2p by April 2027, and completely abolish it by April 2029. With less amount of your income going to National Insurance Contributions, your take-home pay increases.
The Labour Party has made no claims on National Insurance rate reductions because they believe the government does not have enough money to make those cuts. They have also promised not to raise Income Tax and VAT; and have ruled out changing Council Tax bands. Instead, as stated in their manifesto, they plan to raise revenue by:
- Ending tax breaks for private schools, which exempt them from VAT and business rates.
- Closing the loopholes which allow some ‘non-dom’ mega rich people who live in the UK to avoid paying tax.
- Introducing a proper windfall tax on the huge profits the energy giants are making.
Additionally, the Labour Party plans to increase the Stamp Duty Land Tax (SDLT) for non-resident owners by 1%. This means that non-resident UK property owners will face an SDLT surcharge of 3% rather than their current rate of 2%.
How Will Income Tax Changes Affect You?
Income Tax in the UK is paid on income from employment, rental property, benefits, pension, profits from self-employment, returns from investment and savings under a specific threshold. The rate of Income Tax you pay varies according to your earnings. The current rate of Income Tax, applicable from 6 April 2024 to 5 April 2025, are:
Tax Brackets | Employment Income | Tax Rate |
|---|---|---|
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 to £50,270 | 20% |
Higher Rate | £50,271 to £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Also, you will lose £1 of personal allowance for every £2 of earning above the £100,000 threshold. So, if you earn over £125,140, you will no longer be eligible for the personal allowance deduction.
Both the Conservative and the Labour parties have claimed not to raise Income Tax. However, the personal allowance threshold of £12,570 is set to remain frozen till April 2028. This threshold freeze will force taxpayers to pay the higher tax rate as their wages increase according to inflation in the next four years.
Furthermore, Sunak promises to increase the personal allowance threshold for pensioners. The Conservatives have a Triple Lock Plus scheme where the personal allowance threshold will increase at least 2.5% or in line with the inflation.
Is Tax Rise Inevitable?
Tax experts claim that Britain has a history of raising taxes post-election, and there are good chances of history repeating itself. Also, the government is in dire need of money. So, they have to find ways to raise revenue. They can either opt to freeze tax thresholds, cut certain benefits, or find other alternatives.
With the personal allowance threshold frozen until 2028, the NI rate cut will be overshadowed as more people will pay more taxes. This process is called Fiscal Drag. According to the Office for Budget Responsibility (OBR), the fiscal drag will create 3.2 million basic rate taxpayers by 2028 and 2.6 million higher rate taxpayers. So, even without the National Insurance and Income Tax rate changes, people will pay more.
Conclusion
The tax rates for major taxes, such as Income Tax, National Insurance, and VAT, will not rise as promised by the Conservatives and the Labour Party. However, with government funds not enough for all the sectors to function properly, they should come up with alternatives. One of those alternatives can be the personal allowance threshold freeze. This will make people pay more taxes as their wages increase over the years.
The government may also cut certain benefits, investigate into more unpaid taxes, and find other alternatives to raise the revenue. Also, the HMRC is getting more information than ever about foreign investors from the CRS, which could also boost tax collection.
The threshold freeze cancels out any National Insurance rate cuts that the government proposes. Due to these alternatives, the taxpayers will be left with less money than they anticipate as the government needs to generate revenue to provide benefits and work smoothly.
