MONEY COMMENT
Your Pay Cut Arrives Next Month

By Cliff D'Arcy
March 5, 2003

Earlier this week, we wrote about hanging on to as much of your money as possible in Eight Ways To Pay Less Tax.

Sadly, thanks to growing strains on our nation's finances, our government is spending more money than it is collecting in tax. To counter this problem and avoid excessive government borrowing, Gordon Brown may be forced into announcing tax rises in his Budget on Wednesday, 9 April.

However, in the meantime, we already have one tax rise coming up, which takes effect on 6 April, the start of the 2003/04 Tax Year.

Most working people, whether employed or self-employed, pay National Insurance Contributions (NICs). These payments help fund the National Health Service (NHS), pensions and other state benefits.

For simplicity's sake, we are going to look mainly at Class 1 NICs in this article, which are paid by employed people who are between 16 and 65 (60 for women). Self-employed workers pay Class 2 and usually Class 4 NICs.

Currently, during the 2002/03 Tax Year, employers, employees and the self-employed pay NICs on their earnings from £89 a week up to £585 a week.

From 6 April, an additional 1% will be charged on all earnings over £89 a week, hitting all three of the above groups. The government claims this extra cash will be used to fund spending increases in the NHS.

So, if you earn more than £4,615 a year (the "Earnings Threshold" for NICs), you're going to take home less pay, as shown in this table:

Your salary Extra 1% NICs per year
£5,000      £3.85
£10,000     £53.85
£15,000     £103.85
£20,000     £153.85
£25,000     £203.85
£30,000     £253.85
£35,000     £303.85
£40,000     £353.85
£45,000     £403.85
£50,000     £453.85
£100,000    £953.85

Also, the "Upper Earnings Limit" for NICs is rising from £585 to £595 a week. This means that workers earning £30,940 a year or more will pay £52 more in NICs next year (on top of the above figures).

Most British workers earn less than £25,000 a year, however, even earnings at this level will mean around £3.92 a week less in your pay packet - enough for a couple of pints of beer or glasses of wine (but not at London prices)!

And if this isn't enough bad news, the chancellor isn't increasing the basic personal tax allowance in line with inflation. This effectively means that we'll all pay more income tax too, thanks to our pay rises over the last year. Big increases in council tax are also expected, to add to the fun.

If you're not yet ready to tighten your belt and adjust to your pay cut, read our Financial Health Check, which is designed to help you take a long, hard look at your money habits.