National Insurance and income tax: How are they changing and how much do I have to pay?

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Woman calculating her taxesImage source, Getty Images/BBC

The government is expected to cut National Insurance (NI) in the Budget.

However, previous changes to tax rules mean the amount people pay overall is rising.

How could National Insurance and income tax change?

This would follow a previous NI cut from 12% to 10% for 27 million workers in January. A reduction for self-employed workers takes effect in April.

Cutting NI by another 2p would save someone earning an average wage of £35,000 an additional £449 a year.

The International Monetary Fund (IMF) and the Institute for Fiscal Studies (IFS) think tank have both warned the government against unaffordable tax cuts.

How has National Insurance already changed?

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NI on income and profits above £50,270 remains at 2%.

NI rates apply across the UK. It is not paid by people over state pension age, even if they are working.

How is National Insurance changing for the self-employed?

From the same date, they will no longer pay a separate category of NI called Class 2 contributions.

The government says the two measures will be worth £350 a year for a self-employed person earning £28,200.

Why are millions paying more tax?

Millions of people will pay hundreds of pounds more in tax because of changes to the tax thresholds. These are the income levels at which people start paying income tax, or have to pay higher rates.

Freezing the thresholds means that more people start paying tax and NI as their wages increase, and more people pay higher rates.

Total UK tax take . As a % of the size of the economy.  Figures from the time of Autumn Statement 2023.

According to the IFS, by 2027-28 an employee earning £35,000 “will be paying about £440 a year more in direct tax overall as a result of all the changes to income tax and NI since 2021”.

What are the current income-tax rates?

Income tax is paid on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.

The Basic rate is 20% and is paid on annual earnings between £12,571 and £50,270.

The Higher rate is 40%, and is paid on earnings between £50,271 and £125,140.

Once you earn more than £100,000, you also start losing your tax-free personal allowance.

You lose £1 of your personal allowance for every £2 that your income goes above £100,000.

Anyone earning more than £125,140 a year no longer has any tax-free personal allowance.

The additional rate of income tax is 45%, and is paid on all earnings above £125,140 a year.

These apply in England, Wales and Northern Ireland.

Who pays most in income tax?

For most families, income tax is the single biggest tax they pay.

But for less well-off households, a greater share of family income goes on taxes on spending, known as indirect taxes.

For the poorest fifth of households, VAT is the biggest single tax paid.

How do UK taxes compare with other countries like France and Germany?

In 2022 – the most recent year for which international comparisons can be made – that figure was 35.3%.

That puts the UK right in the middle of the G7 group of big economies.

France, Italy and Germany tax more; Canada, Japan and the US tax less.

So in comparison with other countries, the UK is not that highly taxed.

However, overall taxation is high according to historical rates.

At the time of the 2023 Autumn Statement, the OBR said taxes would rise “in each of the next five years to a post-war high of 38% of GDP”.