Nearly 30 million income earners – both employed and self-employed – will pay less in National Insurance Contributions (NICs) next year, but the gain in take-home pay is dampened by silent and stealthy ‘fiscal drag’.
In the much-anticipated Autumn Statement, Chancellor Jeremy Hunt outlined his plan for a stronger economy to “reward hard work” and set out the Government’s commitment to cut taxes.
For the 27 million PAYE workers, the main rate of National Insurance tax (Class 1 NICs) will be cut by 2p/two percentage points from 12% to 10% on earnings between £12,570 and £50,270.
From 6 January 2024, this means the average worker earning £35,400 a year will save £450 on tax as they pay over 15% less in NICs.
The Government said the combined rate of income tax and NICs for employees paying the basic rate of tax will therefore fall from 32% to 30% – the lowest combined basic rate since the 1980s.
Hunt said: “If we want people to get up early in the morning, if we want people to work nights, if we want an economy where people go the extra mile and work hard then we need to recognise that their hard work benefits all of us. So today, I am going to cut the main 12% rate of employee National Insurance.
“I would normally bring in a measure like this for the start of the new tax year in April, but instead tomorrow, I’m introducing urgent legislation to bring it in from 6 January, so that people can see the benefit in their payslips at the start of the new year.”
Tax cut for the self-employed
For the nation’s army of two million self-employed small business owners “who literally kept our country running during the pandemic”, according to the Chancellor, the “outdated and needlessly complex” Class 2 NICs will be axed next year.
Currently, Class 2 NICs consists of a flat rate compulsory charge of £3.45 a week on earnings above £12,570, which was due to rise to £3.70 from 6 April 2024. But instead from 6 April 2024, Class 2 NICs will be scrapped altogether, saving at least £192 per year.
However, the Government confirmed that access to contributory benefits, including the state pension, will be maintained and those currently paying voluntarily will still be able to do so at the same rate.
At the same time, Hunt announced a big change to Class 4 NICs which is currently set at 9% on earnings between £12,570 and £50,270. It will be cut by 1p (one percentage point) from 9% to 8% from 6 April 2024.
Taken together these changes will mean the average self-employed person on £28,200 will save £350 in 2024/25.
Further, the OBR forecast these changes will increase the number of people in employment by 28,000 by 2028/29, alongside a further substantial economic benefit from those in work increasing their hours.
Welcome cuts but still paying more tax
Laura Suter, head of personal finance at AJ Bell, said this is the fifth change to National Insurance rates or thresholds in less than two years.
She added: “Today’s cuts to both employed and self-employed National Insurance comes with a price tag of £9.44bn for the government from April. That feels pretty meaty, but not when you put it next to £50bn a year the Government is expected to make from freezing income and National Insurance thresholds. It’s the classic case of giving with one [hand] and taking far, far more with the other. While the tax cut will be welcomed by workers around the country, they shouldn’t overlook the fact that they are still paying more in tax than if the Government had never frozen thresholds.”
Shaun Moore, tax and financial planning expert at Quilter, said: “Hunt has given workers a miniscule nibble of carrot with his 2p cut to National Insurance contributions after they’ve been battered by the stick recently. 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.
“More money in people’s pockets thanks to tax cuts is no doubt a good thing but this move gives someone on the average salary of £32,963 an extra £8.60 a week due to the NI cut. But the reality is you only are getting a benefit of around 50% of this due to the frozen tax bands and fiscal drag. If we assume the tax bands had increased by 2% over the last four years, someone earning £34,963 should be a further £308.40 better off. Therefore, if you take this off today’s headline saving in tax it is actually only a saving of £139.46 over the year or a rather measly £2.68 a week.”