Increasing the National Insurance threshold does little to help benefit claimants

March 25, 2022 – Phil Agulnik
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It’s no understatement to say, the Chancellor’s Spring Statement has done little to help low-income families on benefits in the face of an oncoming cost-of-living crisis. As many commentators have discussed, there was no direct help from the Treasury with meeting higher fuel bills over the coming months. The only relevant measure was an extra £500m for the ‘Household Support Fund’, a discretionary scheme run by local authorities to provide emergency support. Given the scale of the problem this hardly seems up to the task.

Instead of help for everyone to meet higher energy bills, or targeted help such as the £150 rebate on Council Tax bills for anyone in Band D or lower, the Chancellor focussed on providing help for workers through raising the threshold for paying National Insurance Contributions (NICs). He announced he would increase the NICs threshold by £3,000, instead of £300 as previously proposed, saving all but the lowest earners £330.

Many people on benefits won't see the same gain

One criticism of the Chancellor’s strategy is that it only provides help to workers, whereas everyone, unemployed and employed alike, faces the prospect of higher inflation. For most benefit claimants the Chancellor’s NICs announcement has zero impact, as they do not earn enough to pay NICs anyway. But even accepting his focus on workers, for 2.3 million working benefit claimants the extra help provided by the increase in the NIC threshold is much less generous than it seems on the surface[1].

The reason workers on benefits will get less help is because increases in an individual’s earned income result in their benefits being reduced, irrespective of whether this is due to a pay rise, extra hours or (as here) a tax cut. In Universal Credit (UC) the calculation is based on a taper that reduces the amount paid by 55p for every extra pound earned (once a work allowance has been used up).

So, for UC claimants earning just above the new NICs threshold of £12,570, the increase in their net earnings of £330 (because of the increased NICs threshold) will be offset by a reduction in their UC of a little over £180. This means the net increase in the income of a worker on UC will be £150 a year, considerably more than the zero increase experienced by non-working benefit claimants but much less than the £330 increase other workers will enjoy[2] .

In fact, for some benefit claimants the increase in their net income will be even less. People with low earnings or high Council Tax bills also receive help through an extra part of the benefit system, the local-authority administered benefit Council Tax Reduction (CTR). Like UC this help is means-tested, with assistance being tapered away as net income goes up. The standard rate for this taper is 20%, so for workers who get help through CTR and UC the combined taper is 64% once the interaction between the two is included. For claimants getting both benefits the net increase in income because of the increased NICs threshold is not £330 but £120, once all benefit changes have been included.

Could there be new opportunities in the longer term? 

In the short term at least, it seems the Chancellor has done little to help benefit claimants. However, in the longer term the increase in the NICs threshold may open up new opportunities for benefit reform. In particular, by aligning the NICs threshold with the personal allowance for income tax there is now a clearer route to tax-benefit integration.

In his speech the Chancellor quoted the Centre for Policy Studies, who described the policy of increasing and aligning tax and NICs thresholds as a “universal working income”. This reflects the fact that (almost) all workers will now get a tax-and-NICs-free allowance of £1,050 a month. However, while the language nods to a universal basic income, the policy is better seen as making the tax system simpler and fairer.

It makes tax simpler as, from July, when the new policy is introduced, it means only one calculation is needed to convert gross to net earnings. From then all employees will pay tax and NICs at a combined rate of 33.25% on earnings over £12,570, so workers will lose about a third of their earnings over £1,050 a month.

At the moment, separate calculations are needed for tax and NICs as they have different thresholds. And the policy is fairer because the workers who benefit most from the change are those earning just above £12,570. By way of contrast, cutting the basic rate, as the Chancellor proposes to do from April 2024, provides most help to people earning at the top of the basic tax band on over £50,000 a year. 

The policy of increasing the NICs threshold could also pave the way to a simpler and fairer benefits system, at least for workers. The effect of setting both thresholds at £12,570 is that, in weekly terms, the value of the tax/NICs allowance will be £80.40 a week from July, above the level of personal benefits like Jobseekers Allowance (which is worth £77 a week from April). If these allowances were made available as a weekly or monthly payment, with all earnings then taxed in full, then it would in effect create a basic income for all workers[3]. Perhaps this is what the Chancellor had in mind by a “universal working income”?

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[1] This figure is only for working people claiming Universal Credit and is taken from https://www.gov.uk/government/statistics/universal-credit-statistics-29-april-2013-to-13-january-2022/. There are also about 1 million people claiming Working Tax Credit, the help for low-income workers introduced by Labour in 2003 (see https://www.gov.uk/government/statistics/personal-tax-credits-provisional-statistics-for-december-2021). Perhaps ironically, the benefit clawback described in this blog does not affect Working Tax Credit recipients, who will get the full £330 benefit of the increase to the NIC threshold. That’s because tax credits are based on gross earnings, before tax and NICs, so are not affected by changes in thresholds or rates.

[2] The analysis here does not include the effect of the 1.25% increase in NICs that comes into effect this April. As earnings rise above £12,570 the effect of the rate rise will cancel out the increase in the threshold, with anyone earning more than £35,000 paying more tax and NI overall. Benefits are calculated on the basis of net earnings, so the benefit clawback reduces as the net gain goes down.

[3] For example, https://leftfootforward.org/2018/09/the-practical-response-to-our-societys-widening-inequality-a-partial-basic-income/?doing_wp_cron=1648134022.3166460990905761718750

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