National Insurance rise: How will it work and what will it mean for you?

The National Insurance rise is a significant change to our tax system - but what will it mean for you?

There are a few changes that need to be considered.

Firstly, the National Insurance rate is going up by 1.25 percentage points from 6 April.

It means that everything you earn over the tax-free threshold was being taxed at 12% and will now be taxed at 13.25%.

That might sound small in percentage terms, but it's actually a sizable tax rise.

Take, for example, someone earning £27,000 a year.

That person was paying around £2,053 in National Insurance annually but that will now go up by over £200.

Across the whole economy, this amounts to an £11bn tax increase for the government.

However, the cost of living crisis is getting worse, inflation is at its highest level in 30 years, and the energy price cap rose at the beginning of April by 54%.

The chancellor, Rishi Sunak, was under huge pressure to relieve the burden on people.

So, in his spring statement he made another adjustment, increasing the National Insurance threshold - the amount we can earn before tax kicks in.

As of April 2022 the threshold is £9,880 (a rise from March of about £300).

But from July it is much more - £12,570.

According to the chancellor, this amounts to a tax cut of around £330 a year for workers.

But what does this mean? How do those two things balance against each other?

From April to July when just the rate rise comes into force, but the threshold remains where it is, all workers will be worse off.

While the highest earners will pay the most, it will be felt across the economy.

But things will change in July.

In fact, the impact of the higher threshold will actually take around two million lower earners out of the direct tax altogether.

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Everyone earning under £32,000 a year will be better off - with one change cancelling out the other.

The aim of the National Insurance tax rise was to help fund the health and social care levy, providing more money for a strapped NHS.

So do the threshold changes mean the NHS will get less than intended? Well, no.

The reason for that is wage inflation.

In other words, because wages are going up, the Treasury is actually forecast to make more from the health and social care levy taxes than expected. This means that the drop in takings due to the threshold rise is, to a degree, balanced out.

It partly explains why the government has decided not to alter the NHS's cash budget. However, it must be noted that the NHS is also affected by wage and energy inflation so in real terms it will have less.

Finally, it's important to note that, when taking into account all the tax changes implemented this year, the tax burden is still very high.

While the taxes are progressive, with the richest paying proportionately more relative to their disposable income, only roughly the poorest 10th of households will be paying less in tax then they were before.

With inflation and energy pressures, it will still feel like a difficult and expensive time for many.