Budget 2011 – Indexation of national insurance contributions
The Chancellor has confirmed that the basis for indexation for National Insurance contribution (NICs) rates, limits and thresholds will be by reference to the consumer prices index (CPI) from the 2012-13 tax year instead of the retail prices index (RPI).
The changes will affect:
- The Class 1 lower earnings limit (LEL), which is the level of earnings at which employees start to accrue contributory benefit entitlement;
- The Class 1 primary threshold (PT), which is the level of earnings at which employees begin to pay Class 1 NICs;
- The rate of Class 2 NICs payable by the self-employed;
- The Class 2 small earnings exception (SEE), which sets the level of earnings below which the self-employed can be exempted from paying Class 2 NICs;
- The rate of Class 3 NICs payable by those wishing to fill gaps in their contribution record for basic state pension and bereavement benefit purposes; and
- The Class 4 lower profits limit (LPL), which is the level of profits at which the self-employed begin to pay Class 4 NICs.
The secondary threshold for Class 1 employer NICs will be over-indexed compared to CPI and rise by the equivalent of RPI for the course of this Parliament.
The annual levels of the Class 1 Upper Earnings Limit and Class 4 Upper Profits Limit will continue to be aligned with the income tax higher rate threshold (the sum of the personal allowance and basic rate limit).
This change is part of a Governmental decision to move the underlying indexation assumption for all direct taxes to the CPI.