A multibillion-pound tax cut has taken effect, with 27 million UK employees in line to benefit, the government has said.
However, there are warnings that despite the cut in national insurance from Saturday, millions of people will still end up being worse off this year. Here we look at what is changing, and what it might mean for you.
What is happening?
The government is cutting the main rate of national insurance contributions (NICs) paid by employees from 12% to 10% with effect from 6 January. This was announced by the chancellor, Jeremy Hunt, in the autumn statement in November.
The “class 1” contributions are made on earnings received by anyone between the age of 16 and state pension age who is getting more than £242 a week from one job. You have to pay them, and they are automatically deducted by your employer.
Employees will now pay 10% on earnings between £242 and £967 a week. They pay 2% on all earnings above £967 a week – which equates to an income of £50,284 a year. The Treasury says this is “the largest ever cut to national insurance” and that 27 million workers will benefit.
What does it mean in pounds?
The Treasury says that for an average employee on a salary of £35,400, the reduction is worth £450 a year.
The changes will mean an average full-time nurse on £38,900 will make an annual gain of more than £520, while an average teacher on £44,300 will receive an additional £630 a year, it says.
What is national insurance for?
Employees pay NICs on their wages as well as income tax, while employers also make contributions for staff.
NICs raise huge sums for Treasury coffers and are used to cover the cost of certain benefits, including new-style jobseeker’s allowance and maternity allowance, and the state pension.
What about the self-employed?
About 2 million self-employed people will also benefit from a tax cut. If you are self-employed and your profits are £12,570 or more a year, you usually pay “class 2” and “class 4” NICs.
From 6 April this year, the government is reducing the main rate of class 4 self-employed NICs – paid on profits between £12,570 and £50,270 – from 9% to 8%. It is also abolishing class 2 self-employed NICs. These are now £3.45 a week.
Taken together, these changes will result in an average self-employed person on £28,200 a year saving £350 in 2024-25, says the Treasury. A typical self-employed plumber on £34,400 will be £410 better off as a result of these cuts, it adds.
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So I’m going to be better off, aren’t I?
Yes and no. A lot of commentators have said the government is giving with one hand but, in many cases, taking back a lot more with the other as a result of the previouslyannounced freezing of personal income tax thresholds until 2028.
Over time, this will drag more and more low-income households into paying basic-rate tax, which kicks in at £12,570 a year, and those with earnings nearing £50,000 into the higher 40% rate – which kicks in at £50,270 – thus raising billions for the Treasury. This phenomenon, called “fiscal drag”, has been called a stealth tax by many critics.
The wealth management company Quilter says that despite the NICs cut, a worker on an average salary will be just £2.68 a week better off than they would have been had the tax thresholds not been frozen.
A few days ago, the Resolution Foundation thinktank said the bottom half of earners would lose any gains from the lowering of national insurance payments when their income tax bills go up in April.
It said the net effect would result in all employees earning below £26,000 a year being worse off or unaffected, while those on more than that would gain. “If you earn £50,000, you’re in the sweet spot and will benefit most,” it said.
Are all employers ready for this?
We will soon find out. The accountancy firm RSM said employers were “facing a race against time” to get their payroll systems updated by the deadline.
The changes were only announced on 22 November, and a lot of key staff would have been off over Christmas and the new year.
RSM said if employers were unable to update their software before Saturday, HM Revenue and Customs would require them to rerun their payroll retrospectively for past periods where higher NICs had been incorrectly applied.
“Employees should therefore contact their employer for any refunds in the first instance. All this means employers are likely to have an increase in employee queries in January and February,” it said.