Start point for paying income tax and national insurance to go up

People may have more money in their pockets next year as the level at which people start paying income tax and national insurance contributions rises.

A change to the personal allowance – how much you can earn before paying income tax – will likely increase it from £ 12,500 to £ 12,570.

The level will rise in line with inflation – using the consumer price index (CPI) of 0.5 percent from September, the Express reports.

While that may sound like good news, inflation will likely make you pay more for things in the coming year.

The basic rate will also increase.

This is the amount of your taxable income between £ 12,501 and £ 50,000 that will be taxed at 20 percent.

Amounts above that figure are taxed at a higher rate.

The base rate should be set at £ 37,700, up from £ 37,500 this tax year, the Institute of Chartered Accountants in England and Wales (ICAEW) believes.

That again sounds like a win for low- and middle-income people – though again inflation could eat up all those gains.

And be warned, the personal deduction is not provided on taxable income in excess of £ 125,000.

The details of the change in the personal allowance were set out in Chancellor Rishi Sunak’s spending statement.

The report reads: “The government will increase the personal income tax deduction from 2021-22 and the threshold for the higher rate in line with the September CPI figure.

“The government will also use the September CPI figure as the basis for setting all national insurance limits and thresholds, and the rates for class two and three national premiums, for 2021-2022.”

Income tax rates and bands vary depending on how much you earn.

For the current tax year – 2020/21:

  • the personal deduction up to £ 12,500 – meaning the tax rate is zero percent.
  • the base rate refers to taxable income between £ 12,501 and £ 50,000 taxed at 20 percent.
  • the higher rate refers to taxable income from £ 50,001 to £ 150,000 – with a tax rate of 40 percent.
  • the additional rate relates to taxable income in excess of £ 150,000 – taxed at 45 percent.

The Institute of Chartered Accountants in England and Wales (ICAEW) has calculated that the personal stipend should increase to £ 12,570 for 2021/22.

The base income tax rate limit will also be increased and they think the base rate limit for 2021/22 will be set at £ 37,700, up from £ 37,500 this tax year.

The CPI inflation rate used to make these assessments will also be used for new national insurance limits and thresholds, and the rates of Class 2 & 3 National Insurance premiums in 2021/22, Your money reports.

The Tax Reform Group for Low Income (LITRG) told that website that national insurance premiums, the primary Class 1 threshold at which people start paying premiums, could increase from £ 183 per week to £ 184.

Again, this sounds like good news on paper, but inflation shouldn’t be overlooked.

The LITRG calculates that those earning £ 25,000 a year could end up paying £ 14 less in income tax and £ 5.64 less in Class 1 social insurance premiums.

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