A big national insurance cut was the centrepiece measure of Jeremy Hunt’s autumn statement – but just how much better off will UK employees really be?
The chancellor is cutting the main rate of national insurance contributions paid by workers from 12% to 10% with effect from 6 January 2024, which he said would benefit 27 million people. He also announced changes to the national insurance paid by those who are self-employed.
What is national insurance?
National insurance is similar to income tax and is taken from salary or, for self-employed people, through self-assessment, but there are differences. Workers pay it on earned income only – so it does not apply to interest on shares or money from pensions.
For employees, it is charged according to each job, rather than their total income, so those who have multiple low-paid jobs may not pay as much as someone earning the same amount from a single position. It is also paid by employers, and unlocks access to certain benefits, including the state pension.
To make things complicated, there are several classes, with separate ones for employees, employers and self-employed people, and some payments are voluntary, while others are mandatory. Class 3 is voluntary, and these contributions are paid by workers who want to build up their entitlement to benefits.
National insurance is paid between the age of 16 and state pension age.
National insurance is paid into the national insurance fund, which is used for benefits but is not ringfenced. In some years the government tops up the fund, while in others it uses the surplus for government expenditure elsewhere.
How much do individuals pay?
An employee who earns more than £242 a week, or £1,048 a month, in a job, currently pays 12% in class 1 national insurance contributions. Once they earn more than £967 a week, or £4,189 a month, they pay 2% on the extra.
Someone who is self-employed with a profit of £12,570 or more a year pays class 2 contributions, which this year is £3.45 a week. That same person also pays class 4 contributions, which in the current tax year are equal to 9% of their profits between £12,570 and £50,270, and 2% above that.
An employee earning £50,000 currently pays £4,491.60 a year in national insurance contributions.
What do people get for it?
National insurance in effect buys an entitlement to a range of state benefits. Those who have built up enough years of contributions qualify for the basic state pension, while class 1 and class 2 contributions buy entitlement to employment and support allowance, maternity allowance and bereavement support payment. Class 1 also counts towards additional state pension and the new-style jobseeker’s allowance.
What is changing for employees?
From 6 January 2024, the main rate of class 1 national insurance will be cut to 10%, so workers will get more in their first pay packets of the new year.
The Treasury said the change meant an average worker earning £35,400 would get a tax cut of more than £450 in 2024-25. It added that a typical full-time nurse on £38,900 would receive an annual gain of more than £520, while working families with two earners on the average income would gain £900.
An employee earning £50,000 will pay £3,743.00 in national insurance after the change, saving £748.60.
However, commentators said the government was giving with one hand but, in many cases, taking back a lot more with the other, as a result of the previously announced freezing of personal income tax thresholds until 2028.
What about self-employed people?
From April 2024, self-employed workers will no longer have to pay class 2
contributions, and the main rate on class 4 contributions will be reduced to 8%.
The chancellor said these changes would save a self-employed person with profits of £28,200 a total of £350 in 2024-25.
Self-employed workers will still qualify for the benefits linked to class 2 contributions. Those who earn less than £6,725 can make voluntary contributions so they are entitled to those benefits, and this will continue. Those who make between £6,725 and £12,570 will get a credit, as happens currently.
Does this make up for the tax threshold freeze?
Not really. No changes were announced to income tax, so the freeze on personal tax thresholds until 2028 remains. The thresholds at which national insurance kicks in have also been frozen this year, so more people will find themselves paying as wages go up.
According to the Office for Budget Responsibility, the 2p national insurance cut will offset only a quarter of personal tax-raising measures announced by the government since 2021, which include freezing allowances and national insurance thresholds.