The chancellor’s Autumn Statement introduced a raft of changes that affect the National Insurance contributions that UK workers pay, which started from January 2024.
National Insurance contributions are paid each year by those in employment, so that they can qualify for certain benefits, most notably the State Pension. Normally, these contributions automatically come out of your pay if you are employed by someone else, or you must submit them yourself if you are self-employed.
Although the announced cuts to National Insurance contribution rates certainly sound good at first glance, as lower rates mean less money coming out of your pay, the freezing of other tax thresholds means you won’t necessarily end up better off overall.
In this article, we’ll take a detailed look at how National Insurance is changing and how these changes might benefit you.
How do National Insurance contributions work?
If you’re over 16 and you earn a certain amount from your job, then you pay mandatory National Insurance contributions (NICs). First, we’ll outline the current rules, then in the next section we’ll look at what’s changing this year.
If you are an employee and you earn more than £242 a week (£1,048 a month) from your job, you pay Class 1 contributions. These are automatically deducted from your pay by your employer on any portion of your pay between £242 to £967 a week or £1,048 to £4,189 a month – previously this was at a rate of 12%, but this was lowered to 10% on January 6. You also pay 2% on any portion over the upper limit. These payments continue until you reach the State Pension age, which is currently 66 for both men and women.
If you’re self-employed and make a profit of more than £12,570 a year, you currently pay Class 2 and Class 4 contributions. Since you have no employer, you have to make these payments yourself, usually via your Self Assessment tax return. Currently, Class 2 contributions are £3.45 a week, while Class 4 contributions are 9% of any profits between £12,570 and £50,270 and 2% of your profits over £50,270.
By making these contributions each year, you build up ‘qualifying years’ on your National Insurance record – you need 35 qualifying years to be entitled to the full new State Pension when you retire.
If you don’t earn enough to meet the lower threshold for paying National Insurance, you will still be treated as having qualifying years if you earn over £123 a week (employed) or £6,725 a year (self-employed). You can also get National Insurance credits to fill gaps in your record if you are not working due to illness, having to care for someone, or raising a child. Read more in our article When can I claim National Insurance credits?
If there are gaps in your National Insurance record, you can buy qualifying years by making Class 3 contributions. You can buy up to 10 years’ contributions at a rate of £17.45 per missing week of NI contributions (£907.40 per year). This will boost your pension by just over a fiver a week, or around £302 a year. Bear in mind that you can only usually make up gaps from the previous six years.
What are the changes to National Insurance?
The announcements in the chancellor’s Autumn Statement included a series of cuts to National Insurance, meaning that less money will come out of people’s pay each year in order to fulfil their qualifying years.
The Chancellor announced a 2% cut to Class 1 contributions which came into effect on January 6 for a new rate of 10%. The 2% rate on earnings over £967 a week will remain unchanged. This amounts to an approximate saving of £349 a year for someone earning £30,000, £448 a year for someone on an average salary of £34,963, and £749 a year for someone earning £50,000.
Self-employed contributions are also set to be cut. Class 2 National Insurance will be abolished entirely, and the Class 4 rate will be reduced from 9% to 8% from April. According to the government, this will result in an average total saving of around £350 for someone earning £28,000 a year.
Are the changes to National Insurance rates a good thing?
On the face, these changes sound like good news for UK workers’ wallets – but some experts warn that the benefits may not be as great as they sound.
This is mainly because income tax rates and thresholds, as well as the thresholds for National Insurance Contributions, have been frozen since 2021, and will remain frozen this year. What this means in practice is that, as wages naturally increase over time, people get disproportionately pulled into higher tax brackets and the government collects more money in tax. This effect is known as fiscal drag, because people are essentially “dragged” into paying tax, or paying at a higher rate.
Chris Etherington, tax partner at RSM UK, said: “‘Ordinarily, the income tax personal allowance and the basic rate limit would have increased from April 2024. This increase would typically have been in line with the 6.38% percentage increase in the consumer price index in September 2023 from the year before.”
“This means that the income tax personal allowance would have been £13,380, rather than £12,570. Similarly, the higher rate threshold would have increased to £53,580, rather than the current amount of £50,270.
“As a result, more individuals will be dragged into the tax net and higher tax rates when they otherwise wouldn’t have. The Office of Budget Responsibility (OBR) estimates there will be an additional four million workers paying tax in the 2028/29 tax year due to these fiscal drag measures. In addition, they estimate three million more workers will pay higher-rate tax at 40%.
“It’s clear that many would have been better off if the chancellor simply unfroze these tax thresholds and allowances. For some, this could be described as the tax cut that actually isn’t one.”
Shaun Moore, tax and financial planning expert at Quilter, agreed. He said: “The reality is workers are just £2.68 a week better off due to today’s tax ‘giveaway’ than they would have been had tax thresholds not been frozen.”
Some commentators have also noted that cutting only National Insurance and not income tax will deliver no benefit to most retirees, as pensioners do not make National Insurance contributions in the first place. However, pensioners will still benefit from a considerable hike in the State Pension, thanks to the government’s decision to uphold the triple lock.
Experts have expressed concern that the National Insurance cuts could fuel inflation as well, despite the government’s goal to reduce inflation to its 2% target by 2025. There are fears that the Bank of England will consequently be forced to hold the base rate at 5.25% into summer instead of cutting it in the spring as hoped.
This would be bad news for borrowers, as it would mean that interest rates on personal loans and mortgages will likely stay relatively high. Many homeowners will have spent months waiting for interest rates to stabilise and mortgage deals to become more attractive, and further delays mean that they have to either settle for a deal now or stay on their lender’s Standard Variable Rate.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “while people who are struggling to make ends meet are crying out for some relief from tax, it could do more harm than good if it keeps interest rates higher for longer – so that what we gain from tax cuts we lose in higher mortgage payments.”
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