National Insurance: How much better off would workers be with 2p cuts?

Deep cuts to national insurance were at the center of Jeremy Hunt’s autumn statement, and he did the same in his spring budget. But how much better off will UK workers actually be?

The Chancellor will cut the main National Insurance Contribution (Nics) rate paid by workers from 10% to 8% from 6 April 2024, which he said will benefit 27 million workers. He also announced reforms to national insurance contributions paid by the self-employed.

What is National Insurance now?

National Insurance is similar to income tax in that it is withdrawn from wages or, for the self-employed, through self-assessment, but there are differences. Workers pay this fee based solely on earned income, so it doesn’t apply to stock interest or pensions.

For employees, it’s based on each job rather than their total earnings, so those who work multiple low-wage jobs may not pay as much as someone who earns the same amount in a single position. It is also paid by the employer and may be eligible for certain benefits, including the state pension.

To complicate things, there are several categories, with different categories for employees, employers and self-employed people, and some payments are voluntary while others are mandatory. Category 3 is voluntary contributions, which are paid by workers who want to enhance their benefit rights.

National Insurance contributions are payable 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 subject to restrictions. In some years, the government replenishes the fund, and in other years, the surplus is used for government spending elsewhere.

How much do we have to pay now?

Employees earning more than £242 per week or £1,048 per month are now required to pay a 10% Category 1 National Insurance contribution. They pay 2% on all earnings over £967 a week, which equates to £50,284 a year.

Self-employed people with annual profits of £12,570 or more pay a Tier 2 contribution rate, which this year is £3.45 per week. The individual also pays Level 4 contributions, equivalent in the current tax year to 9% of their profits between £12,570 and £50,270, and 2% above.

What’s changing?

From 6 April 2024 (the start of the new tax year), the main rate for Class 1 National Insurance will be reduced to 8%. This follows a January rate cut from 12% to 10%.

On the same day, the government will reduce the tax rate for Class 4 self-employed NICs from 9% to 6% – a larger reduction than originally planned. It will also abolish class 2 self-employed NICs.

How much will I benefit?

The Treasury said workers on an average salary of £35,400 would save more than £900 a year as a result of the cuts in January and April.

Teachers, who earn an average of £44,300, will receive £1,250 a year, the report said.

Just to take the latest announcement as an example, the new 2p relief is worth £148.60 a year for those working on a working income of £20,000 and £748.60 a year for those earning £50,000.

Anyone earning enough to pay the higher rate will get £754 more a year than expected.

The Treasury said self-employed people earning an average income of £28,000 would save around £650 a year through two cuts.

What do people get out of it?

State insurance effectively entitles workers to a range of state benefits. Those who have contributed for a sufficient number of years qualify for the basic state pension, while primary and secondary contributions buy employment and dependency benefits, maternity benefits and bereavement benefits. Category 1 also counts the Additional State Pension and the New Jobseeker’s Allowance.

Could this make up for the impact of the tax threshold freeze?

Not suitable for everyone. No changes were announced on income tax, so the freeze on personal income tax thresholds until 2028 remains in place. This year, the national insurance activation threshold has also been frozen, so as wages rise, more and more people will find themselves paying premiums.

According to the Office for Budget Responsibility, the two sets of national insurance cuts announced in the 2023 Autumn Statement and the 2024 Spring Budget will not offset the additional income tax paid by everyone as a result of the freezing of thresholds.

The Resolution Foundation said anyone earning up to £19,000 would still be worse off than if their personal allowance increased with inflation. The biggest increases were among those earning £50,000 a year, the report said.

Pensioners will not benefit from national insurance changes.