The dust is still settling after the Spring Budget announcement, as workers digest what appeared in the Chancellor’s red briefcase. Instead of chipping away at income tax, Jeremy Hunt made a 2p cut to National Insurance (NI), which stole many headlines.
But what impact will this have on your salary and where does this leave pensioners?
On Wednesday, Hunt confirmed that NI will reduce from 10% to 8% from the start of the new tax year on 6 April. The second consecutive NI reduction means the average worker on a salary of £35,400 (before tax) would save around £450 per year.
In a move rumoured earlier in the week, the Chancellor said this would impact over 29 million workers in the UK and would mean those employees would see the “lowest effective personal tax rate since 1975”.
One group of workers who might wish to raise a toast are self-employed workers. The NI rate for Class 4 contributions paid by the self-employed has been cut from 9% to 6%, at the same time as the Government scrapping Class 2 contributions.
So, for a self-employed worker on £35,000, it means from April you’ll save £850 per year, while those earning above the higher-rate threshold of £50,270 will save a maximum of £1,310.40 per year.
Wins for self-employed workers
“The cuts to National Insurance benefit self-employed lower earners more than employed lower earners, thanks to the scrapping of Class 2 contributions. These contributions were paid as a flat rate, rather than a percentage of earnings, meaning every self-employed person earning more than the threshold saves around £180 per year at current rates”, Laura Suter, director of personal finance at AJ Bell, said.
NI contributions go towards a Government fund that goes towards the state pension, statutory sick pay, maternity leave, and some unemployment benefits.
Whereas income tax is taken from your pay packet or profits from self-employment during the tax year and provides funds towards public services like the NHS, police force, fire service and education.
Little difference for pensioners
But what about pensioners who don’t pay NI on their income?
Well, they may end up paying more due to the frozen tax threshold introduced in the Autumn Statement. Particularly more so rather than if there was an income tax chop – which was widely speculated leading up to the Spring Budget.
Alice Guy, head of pensions and savings at Interactive Investor, said: “Many families will still feel poorer than a few years ago as frozen tax thresholds and rising living costs erode the value of the National Insurance tax cut.
“A pensioner with an income of £20,000 will pay £230 more tax next year due to frozen tax thresholds, with nothing to mitigate the extra cost.”
The move could also lessen the amount of cash going into workers’ retirement pots too, according to Justin Corliss, technical manager at Royal London. Corliss said: “While salary sacrifice to maximise pension contributions will remain very tax efficient, the changes in NI may reduce the amount going into pensions.”
Due to that frozen tax threshold, many will feel the impact of earning more in wages but being taxed higher. So, even with a NI reduction, if you are on £20,000, you would end up losing £80, as more of your income would be taxed at a higher rate. More on that to follow.
Differences between lower, middle and higher earners
However, while you’re on an income below £12,570 per year, you do not pay any NI, so the move will not boost or hinder your earnings. But, if you earn £15,000 per year, you will be better off in NI terms by £100 per year when the Autumn Statement cut is also factored in.
If you are earning between £50,000 to £100,000, in terms of NI, this is where the most benefit will be felt, compared to when the rate was 12% last year. Workers taking home that amount or more before tax will see their NI bill reduced by around £1,500.
But, this is where the differentiation between income tax and NI needs to be considered to weigh up just how much better off you’ll be under the new Budget plans.
If you are on what is considered a middle or higher income, overall the combination of frozen income tax thresholds and NI cuts will leave you up to £970 per year better off.
But, while tax is not being increased to match inflation, if you are on a lower income there will be up to £388 extra swiped off your income.
Why did the Government choose NI over income tax cuts?
The reason why the Government opted to cut NI contributions rather than income tax is largely due to the expenditure involved.
Faye Church, senior chartered financial planner at Investec Wealth & Investment (UK), said: “Cutting National Insurance to a starting rate of 8% is a cheaper alternative to cutting income tax for the Government, around £4bn less, yet a much larger saving to the individual.
“A 2p cut in income tax would have cost the Exchequer in the region of £14bn, whereas a 2% cut in National Insurance will cost a slightly lesser £10bn and satisfies the Chancellor’s promise to reduce the tax burden on working families.”
The senior personal finance analyst at Interactive Investor, Myron Jobson, said: “National Insurance is cheaper for the Government to implement because it only applies to earned income. So, the cut does not apply to income taken from pensions and income from savings.
“Both taxes are big earners for the Government. In the 2022-23 tax year, the Treasury raked in £250bn and £178bn from income tax and NICs, respectively.”
