The Chancellor, Jeremy Hunt, announced cuts in National Insurance for both employees and the self-employed in the Autumn Statement on 22 November.
The main National Insurance rate for employees is being reduced from 12% to 10% on 6 January 2024. Self-employed Class 2 National Insurance contributions will also be scrapped in April – a change that’s been in the pipeline since 2015.
On the surface, this is good news for workers. But it’s not always easy to figure out from the headlines exactly how tax cuts like this affect you.
Lower National Insurance contributions should mean you keep more of your earnings in 2024, however, it’s important to consider these cuts in the context of previously announced tax rises, ‘stealth’ taxes, and wage growth.
Alice Haine, personal finance analyst at investment platform Bestinvest, said in an email to NerdWallet that while “it all sounds great on paper, in reality the Chancellor is not being quite as generous as first appears as the tax burden is actually going to rise to a record high over the next five years.”
In particular, as wages go up but income tax thresholds remain frozen, more people will be pulled into paying tax for the first time or tipped into higher tax bands. This is known as ‘fiscal drag’.
Here, we explain what the new National Insurance rates are and how they might affect your pay packet. We also give general tips on budgeting and saving – and explore whether there’s anything you can do to combat tax rises and ‘stealth’ taxes.
» MORE: How National Insurance works
What are the new National Insurance rates?
The amount you pay in National Insurance is determined by whether you are employed or self-employed, and how much you earn.
Currently, the National Insurance rate for most employees is 12% on income of £12,570 to £50,270 a year (£1,048 to £4,189 a month) – this rate is changing to 10% from 6 January 2024. The rate for any income over £50,270 a year (over £4,189 a month) will remain at 2%.
You do not pay National Insurance on your first £12,570.
|Class 1 NICs rate from 6 January 2024
|Current rate of class 1 NICs
If you are self-employed, your National Insurance contributions are calculated using your annual profits.
Currently, you pay Class 2 National Insurance contributions at £3.45 a week if your self-employed profits are £12,570 or more.
But from 6 April 2024, those with profits above £12,570 won’t be required to pay Class 2 National Insurance – and you will still have access to contributory benefits such as the state pension. Those who make voluntary contributions can carry on doing so at £3.45 a week. For example, you might choose to make voluntary contributions to ensure you have enough qualifying years to claim the full state pension.
When it comes to Class 4 National Insurance contributions, at the moment you pay 9% on earnings between £12,570 and £50,270, and 2% on profits above £50,270. The main rate will go down from 9% to 8% from April 2024.
|Class 4 NICs rate from 6 April 2024
|Current rate of Class 4 NICs
|£12,570 to £50,270
Laura Suter, head of personal finance at investment platform AJ Bell, wrote to NerdWallet by email following the Chancellor’s announcement, saying: “The simplification of self-employed National Insurance helps to cut through some of the complexity of the tax system for those working for themselves.
“The decision to abolish the Class 2 band of National Insurance will save a worker £179.40 a year at current rates, or £192.40 if you base it on what rates would have increased to next year,” she explained.
Why did the National Insurance contributions rate change?
While Jeremy Hunt said before the Autumn Statement that it would be difficult to cut taxes, in his announcement he claimed that better-than-expected inflation figures meant that he could slash National Insurance.
Bestinvest’s Alice Haine said in her email to NerdWallet that, with a General Election on the horizon, it was “natural” for the Chancellor to make tax cuts the centrepiece of the Autumn Statement.
“But the devil is always in the detail, which is why people should pay close attention to what happens next in the Spring Budget to find out if they really will be better off.”
How much National Insurance will I pay a year?
How much National Insurance you pay is tied to how much you earn.
If you’re an employee, you can use the table below to give you an idea of the amount you will save over a year on your National Insurance contributions in 2024 at different wage brackets.
|Current total National Insurance cost
|National Insurance cost from January 2024
Source: AJ Bell
For self-employed workers, those on lower incomes will see a bigger reduction in National Insurance than employees earning the same amount from April 2024, when Class 2 National Insurance is scrapped and the Class 4 rate changes.
For example, a self-employed person with £20,000 profits will save £253.70 a year from April, whereas an employee on a £20,000 salary saves £148.60 a year (from January).
But higher-earning employees will end up with a bigger reduction than their self-employed counterparts. For instance, an employee earning £60,000 saves £754 a year from January, whereas a self-employed worker earning the same amount saves £556.40 a year from April.
Tax burden rising despite National Insurance cuts
Investment platform interactive investor claims that National Insurance cuts will be “wiped out” because of the impact of fiscal drag.
In its analysis, it says that low-earning employees will pay £401 more tax in 2024-25, even with a £209 National Insurance saving, because income tax thresholds aren’t rising with inflation. Average earners will pay £124 more tax in the same year. This assumes that salaries increase in line with inflation.
Bestinvest’s Alice Haine said in her email to NerdWallet that while workers will “naturally welcome the cuts to National Insurance in the short term, as they will retain more of their take-home pay than they would have otherwise, these stealth taxes mean their overall tax burden is still very much on the up.”
How can you mitigate the impact of fiscal drag?
Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said in an email to NerdWallet that it’s essential to make the most of every possible tax break. “This includes tax efficient savings and investments like ISAs and pensions, which lifts the tax burden [from saving for your future].”
Because personal allowances are frozen, and interest rates on cash savings accounts may be at their peak, more of us may have to pay tax on the interest our savings earn. That’s why it’s important to consider Individual Savings Accounts – or ISAs – as they give everybody a £20,000 tax-free savings allowance every tax year.
Paying into your pension will also usually attract some tax relief, helping you to reduce your tax burden and build your future pension pot.
Here are some tips to help you work out how much you can afford to save in your ISA or put into your pension in the new year:
- Work out your take-home pay. The table above will give you a rough estimate of the impact of National Insurance cuts on your take-home pay if you’re an employee. To achieve a more precise estimate of how much you’ll keep in January, you can find online calculators to work out your annual income and compare the prediction with your latest payslip.
- Calculate what’s left after essentials. Then review your non-essential spending. This includes all your regular weekly, monthly and yearly outgoings, from music subscriptions to trips to the coffee shop. It will give you hard numbers related to where you may be overspending, and how much you could potentially save.
- The 50/30/20 rule. A handy way to budget and divide your take-home pay is:
- 50% on essentials, such as rent, mortgage, bills and food
- 30% on wants and non-essential spending
- 20% on paying off debt and building up savings
- Spending priorities. Although this may not be for everyone, a good rule of thumb when prioritising your spending is:
1. Clear your ‘toxic debt’, such as payday loans or high interest credit cards.
2. Start an emergency fund that can cover unexpected expenses.
3. Contribute to your workplace pension scheme.
4. Continue to add to your emergency fund.
5. Pay off your remaining debts.
» MORE: Budgeting 101: how to make your money go further
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