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National insurance (NI) changes are about to come into effect in the UK, providing a tax cut for around 27 million people, according to the Government.
The changes, first announced by Jeremy Hunt at the Autumn Statement, mean the amount of tax some people pay will go down but come against the backdrop of wider tax rises as well.
Below, we explain how the changes to NI will affect you.
Who will pay less national insurance?
From 6 January, all employed people that pay NI and earn over £12,570 – known as the ‘Class 1 Primary Threshold’ – will see their NI rate cut from 12 per cent to 10 per cent.
This means that if you earn £20,000, you will save just under £150 per year and if you earn £35,000 you will save around £450.
If you earn £50,000, you will save just under £750.
People start paying NI when they reach 16, and stop paying when they reach state pension age.
There are further changes to come for self-employed people, although they will have to wait until April.
Class 4 and Class 2 contributions are currently paid by self-employed people.
The Class 4 rate – paid at 9 per cent on profits between £12,570 and £50,270 – will be cut to 8 per cent from 6 April.
The Government will remove the liability to pay Class 2 contributions – which are currently £3.45 per week – from 6 April.
What about salary sacrifice?
If your employer allows salary sacrifice, then you may be able to sidestep the 10 per cent national insurance payment on your contribution as well as paying less income tax.
Pension salary sacrifice works by the employee agreeing to reduce their salary and their employer agreeing to increase their contributions to the employee’s pension by the same amount. This could be in a workplace pension or SIPP.
For the tax year running from April 6 2024, someone earning £30,000 per year and paying 6 per cent into their pension along with a three per cent contribution from their employer would see £2,400 added to the pot annually – for the cost of just £1,050, according to Hargreaves Lansdowne.
However, there can be downsides to salary sacrifice including lower life cover as employers generally work out the entitlement as a multiple of salary and salary sacrifice makes that salary lower.
It could also mean you find will be offered a lower amount to borrow on mortgages. This is because, as per life cover, the borrowing level is determined by a multiple of a lower salary.
What about other tax changes?
Despite the cuts, many people will still be effectively paying more tax than they were in previous years, because of other changes to the tax system.
In April, the threshold at which people start paying 20 per cent of their income in income tax – £12,570 – will be frozen once again, instead of being increased inline with inflation or average earnings.
The rate at which people start paying tax at the higher and additional rate will be frozen as well.
The Resolution Foundation think-tank has said that employees earning above £26,000 will still gain from the combination of lower NI rates and April’s personal tax thresholds freeze.
The biggest gains will accrue to those earning around £50,000, who get the maximum benefit of around £750 from the NI cut, while losing around £270 from the personal allowance freeze.
But it points out that those earning between £12,570 and £26,000 will lose out, as they too are affected by the freeze but gain less – or even nothing – from the NI cut.
Adam Corlett, Principal Economist at the Resolution Foundation, said: “The Government is keen to cut taxes ahead of the General Election later this year, and is going big today with a £10bn NI cut that will save 29 million workers up to £750 a year.
“Targeting workers via cutting NI is a smarter choice than the options of cutting income tax or inheritance tax. But for many – particularly those earning less than £26,000 – the tax cut today will be offset by the tax rise that is effectively coming in April, when personal tax thresholds are frozen again.”
