Calculated according to employment status and earnings, it’s essential for workers to pay National Insurance Contributions (NICs) to help provide funding for essential public services like the NHS, state pensions, and state benefits.
However, many people believe they are building up a national fund, when it’s more of a ‘pay as you go’ system – each year’s contributions pay for that year’s benefits.
Framing NICs
that way, rather than as just another tax on income, previously allowed politicians to make headlines over basic income tax changes with less attention on revenue from increased NICs – but the Chancellor Jeremy Hunt seemed to give up on this approach last November.
In the Autumn Statement 2023, it was announced that upcoming NIC reductions would be the equivalent of tax cuts for employees and self-employed people.
As of 6th January 2024, the main rate of National Insurance has dropped by 2%, which is effectively a 15% reduction in National Insurance Contributions – resulting in significant savings for millions of workers across a variety of sectors.
Here’s a summary of the changes to NICs in 2024 and what this could mean for you.
How have National Insurance Contributions changed?
Special rules apply to directors, but for regular employees, the NIC cut means that on 6th January this year, the main rate decreased from 12% to 10% on earnings between £12,570–£50,750
a year.
The difference to pay packets is essentially the same as if there had been a 2p cut to basic rate income tax, but it’s the Chancellor’s view that the NIC reduction was the cheaper option, as there’s no tax cut to NIC-free pension or investment income.
The NIC rate for employers didn’t change, staying at 13.8%
on earnings over £9,100.
If you earn less than £50,270 a year, paying pension contributions as a ‘salary sacrifice’ isn’t as advantageous as it used to be, but it’s still an attractive option, as the table shows below (based on a sacrifice of £1,000).
On the other hand, if you’re one of the growing number of higher rate taxpayers, salary sacrifice remains the same unaltered financial advantage.
|
Personal contribution |
Salary sacrifice employer contribution (sacrifice + NIC saving) |
|||
|
Employee NIC rate |
12% |
10% |
12% |
10% |
|
£ |
£ |
£ |
£ |
|
|
Gross salary |
1,000 |
1,000 |
Nil |
Nil |
|
Employer pension contribution |
Nil |
Nil |
1,138 |
1,138 |
|
Employer NIC |
138 |
138 |
Nil |
Nil |
|
Total employer outlay |
1,138 |
1,138 |
1,138 |
1,138 |
|
Employee salary |
1,000 |
1,000 |
Nil |
Nil |
|
Less: Income Tax |
(200) |
(200) |
||
|
Employee NICs |
(120) |
(100) |
||
|
Net pay = net pension contribution |
680 |
700 |
||
|
Tax relief |
170 |
175 |
||
|
Total pension contribution |
850 |
875 |
1,138 |
1,138 |
|
Gain |
33.9% |
30.1% |
||
This is the biggest tax cut in the personal tax system since the allowance for National Insurance increased in 2022, which is believed to now make personal taxes lower for those on average salaries in the UK than in any other G7 country.
Who benefits from National Insurance tax cuts?
The cut to National Insurance Contributions is intended to benefit a wide range of professional workers, from plumbers and police officers to teachers and nurses.
If the average annual pay for a salaried worker is £35,400, reduced NICs will result in them taking home an extra £450 this year. Other examples include annual gains of:
- £520 for a full-time nurse with a £38,900
average salary - £750 for a junior doctor with an average £63,000
salary - £630 for a police officer or teacher on an average salary of £44,300
- £410 for a self-employed plumber earning £34,400
a year - £170 for a night shift cleaner earning £21,000
a year - £900 for a family with 2 earners on average £35,404 salaries
Not only will around 27 million people be better off in jobs across hundreds of different industries, but the OBR (Office for Budget Responsibility) says that this tax cut will also boost the number of employed people by 28,000 by 2028–2029.
By the same tax year, the OBR also estimates that those in work will boost the economy by increasing their working hours by 0.3%, with 94,000 more full-time hours – what the government calls ‘making work pay’.
What are the implications for tax planning?
The changes to the National Insurance system affect millions of taxpayers across the UK, so it’s essential for everyone to understand them for tax compliance and financial management purposes.
That’s why the government has shared plenty of guidance online, including the launch of a new online tool from HMRC that helps people to estimate how much they could save in reduced NICs by entering their salary information.
Both working individuals and businesses who employ workers need to adjust their financial and administrative strategies to ensure they are complying with NIC regulations and making the most of reduced tax liabilities.
Self-employed people who need assistance with bookkeeping and employers who need help managing payroll and accounts could benefit from professional financial services, such as those offered by the team here at gbac.
To discuss what gbac can do for you, get in touch with our accountants in Barnsley.