A big national insurance cut was the centrepiece of Jeremy Hunt’s autumn statement and he has done the same again for the spring budget. But just how much better off will UK employees really be?
The chancellor is cutting the main rate of national insurance contributions (Nics) paid by workers from 10% to 8% with effect from 6 April 2024, which he said would benefit 27 million workers. He also announced changes to the national insurance paid by those who are self-employed.
What is national insurance now?
National insurance is similar to income tax and is taken from salary or, for self-employed people, through self-assessment, but there are differences. Workers pay it on earned income only – so it does not apply to interest on shares or money from pensions.
For employees, it is charged according to each job, rather than their total income, so those who have multiple low-paid jobs may not pay as much as someone earning the same amount from a single position. It is also paid by employers, and unlocks access to certain benefits, including the state pension.
To make things complicated, there are several classes, with separate ones for employees, employers and self-employed people, and some payments are voluntary, while others are mandatory. Class 3 is voluntary, and these contributions are paid by workers who want to build up their entitlement to benefits.
National insurance is paid between the age of 16 and the state pension age.
National insurance is paid into the national insurance fund, which is used for benefits but is not ringfenced. In some years the government tops up the fund, while in others it uses the surplus for government expenditure elsewhere.
How much do we pay now?
An employee who earns more than £242 a week, or £1,048 a month, in a job, now pays 10% in class 1 national insurance contributions. They pay 2% on all earnings above £967 a week – which equates to an income of £50,284 a year.
Someone who is self-employed with a profit of £12,570 or more a year pays the class 2 contributions rate, which this year is £3.45 a week. That same person also pays class 4 contributions, which in the current tax year are equal to 9% of their profits between £12,570 and £50,270, and 2% above that.
What is changing?
The main rate of class 1 national insurance will be cut to 8% from 6 April 2024 – the start of the new tax year. This follows a cut from 12% to 10% in January.
On the same date, the government will reduce the class 4 self-employed NICs rate from 9% to 6% – this is a bigger reduction than had been planned. It will also abolish class 2 self-employed NICs.
How much will I benefit?
The Treasury says that the average worker on £35,400 will save more than £900 a year as a result of the cuts in January and April.
It says the average teacher on £44,300 will gain £1,250 a year.
Taking just the latest announcement, for those earning £20,000 from employment, the new 2p cut is worth £148.60 a year, and for those earning £50,000 it is worth £748.60.
Anyone earning enough to pay higher-rate tax will take home £754 a year more than expected.
An average self-employed person on £28,000 will save about £650 a year from both cuts, the Treasury says.
What do people get for it?
National insurance in effect buys workers an entitlement to a range of state benefits. Those who have built up enough years of contributions qualify for the basic state pension, while class 1 and class 2 contributions buy entitlement to employment and support allowance, maternity allowance and bereavement support payment. Class 1 also counts towards additional state pension and the new-style jobseeker’s allowance.
Does this make up for the tax threshold freeze?
Not for everyone. No changes were announced to income tax, so the freeze on personal tax thresholds until 2028 remains. The thresholds at which national insurance kicks in have also been frozen this year, so more people will find themselves paying as wages go up.
According to the Office for Budget Responsibility, the two sets of national insurance cuts announced in the 2023 autumn statement and 2024 spring budget do not offset the extra income tax being paid across the population as result of the thresholds being frozen.
The Resolution Foundation says that anyone earning up to £19,000 will still be worse off than if the personal allowance had been increased in line with inflation. The biggest gainers, it says, are those earning £50,000.
Pensioners will not benefit from the national insurance change.
