National Insurance calculator: What are NI and income tax and what do I pay?

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Woman calculating her taxesImage source, Getty Images/BBC

The main political parties are setting out their policies on tax and National Insurance (NI) ahead of the general election.

Two 2p National Insurance cuts came info effect in 2024, but previous changes to the way tax is calculated mean the amount many people pay overall has risen.

What have the main political parties promised on NI and income tax?

The Conservatives have promised a further 2p NI cut for employees by April 2027 if re-elected.

The party manifesto also pledges to reduce the main rate of NI paid by the self-employed, abolishing it by April 2029. The party says it will scrap NI completely when it is "affordable to do so".

The Tories had already said they will increase the tax-free personal allowance for pensioners. All other thresholds would remain frozen until 2028.

The Labour manifesto, external says the party will not increase NI, the basic, higher or additional rates of Income Tax, or VAT. They had already said they would not cut NI either, because "the money simply isn't there".

The party previously confirmed that it would keep income tax and NI thresholds frozen until 2028.

The Liberal Democrat manifesto, external says the party's priority would be increasing the tax-free personal allowance for all, "benefiting the vast majority of families and taking more low-paid workers out of paying income tax altogether".

The Green Party plans to increase the NI rate on annual wages above £50,270, from 2% to 8%.

It would also introduce a wealth tax of 1% on all assets worth more than £10m declared in a self-assessment tax return, increasing to 2% on all assets above £1bn.

Image source, BBC

How has National Insurance changed and how much were the previous two cuts worth?

The starting rate for National Insurance for 27 million workers fell from 12% to 10% on 6 January 2024, and again to 8% on 6 April.

The government said that the two cuts were worth about £900 a year for a worker earning £35,000.

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For the self-employed, Class 4 NI contributions on all earnings between £12,570 and £50,270 have fallen from 9% to 6%, which the government said was worth £350 to a self-employed person earning £28,200.

Self-employed workers also no longer have to pay a separate category of NI called Class 2 contributions.

The NI rate on income and profits above £50,270 remains at 2% for all workers.

How does National Insurance work and what does it pay for?

The government uses National Insurance contributions (NICs) to pay for benefits and help fund the NHS.

NI rates apply across the UK. You start paying NI when you turn 16 and earn over £242 a week, or have profits of more than £12,570 a year.

It is not paid by people over the state pension age, even if they are working.

Eligibility for some benefits, including the state pension, depends on the NI contributions you make across your working life, external.

The government records how many years of contributions you have made. Paying a lower rate of NI does not mean you contribute less.

If you do not work, for example because you are a carer or claim benefits, you might be able to receive NI credits instead, which mean you will still qualify for the relevant benefits.

You can also make voluntary contributions to plug gaps in your record.

Why are millions paying more tax?

Despite the NI cuts in January and April, millions will still pay more tax overall because of changes to the tax thresholds.

These are the income levels at which people start paying NI or income tax, or have to pay higher rates.

These used to rise every year in line with inflation.

However, the NI threshold and tax-free personal allowance - the amount you can earn every year before you have to pay income tax, external - have been frozen at £12,570 until 2028. Higher-rate tax will continue to kick in for earnings above £50,270.

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

It will create 3.2 million extra taxpayers by 2028, and 2.6 million more people will pay higher rates, according to the Office for Budget Responsibility, external (OBR), which independently assesses the government's economic plans.

According to the Institute for Fiscal Studies (IFS) think thank, the freeze cancels out the benefits of the NI cuts for some workers.

In the 2024-25 tax year, it says an average earner will have a tax cut of about £340 - from the combined tax changes - and people earning between £26,000 and £60,000 will be better off.

But by 2027, the average earner would be only £140 better off - and only people earning between £32,000 and £55,000 a year would be better off.

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.

Income tax is also paid on some benefits, external and pensions, income from renting out property, and returns from savings, external and investments, external above certain limits.

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.

Some income tax rates are different, external in Scotland.

In Scotland a new 45% band took effect in April. The top rate also rose from 47% to 48%.

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?

You can look at the amount of tax raised as a proportion of the size of the economy, or GDP.

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.

However, overall taxation in the UK is high compared with historical rates.

In its assessment of the 2024 Budget, the OBR said the government would collect 37.1p of every pound generated in the economy in 2028-29.

That would be the highest level in 80 years.