In April 2024, following on from the Spring Budget announcement, National Insurance (NI) contributions for employees were reduced, with cuts also made for the self-employed.
Keeping up with tax updates can often feel like a minefield, so we’ve put together a few tips to help you work out how these changes apply to you and what difference it could make to your income.
What is National Insurance?
Let’s start at the beginning. National Insurance is a component of the welfare state in the UK. It acts like a form of social security, since NI contributions entitle you to certain state benefits such as sick pay, a state pension, jobseekers allowance and more. It also helps to fund the NHS. It was established in 1911 and is collected each month by the HMRC.
Spring Budget updates
On 6th March, Chancellor Jeremy Hunt announce changes in National Insurance to include:
- The NI insurance rate for employees is now 8% reduced from 10%
- Self-employed Class 4 NI contributions have decreased from 9% to 6%
- Self-employed Class 2 NI contributions have been scrapped entirely
Whilst this all sounds positive, the general gist being that you should keep more of your earnings in 2024, it’s important to consider these cuts in the context of tax rises and wage growth (more on that shortly).
Why has National Insurance changed?
With the general election looming and the Conservatives behind in the polls, it was expected that Jeremy Hunt was going to cut taxes in the Spring Budget.
There are rumors that the government has chosen to reduce NI because it costs the Treasury less, and benefits employees at the same time. It also provides incentives for people to work.
What are the new NI rates, and what does that mean for you?
The amount you pay in National Insurance is determined by whether you are employed or self-employed, and how much you earn. Employers also have to pay NI for each of their staff.
Employed
- NI contributions are calculated based on your earnings
- No NI is payable on your first £12,570 earned
- New NI rate of 8% on income of £12,570-£50,270 a year, this equates to between £1,048-£4,189 a month before tax
- 2% on income over £50,270 a year, approximately £4,189 a month.
Self-employed
- Your NI contributions will be calculated using your annual profits.
- From 6 April 2024, those with profits above £12,570 aren’t required to pay Class 2 National Insurance.
- Class 4 National Insurance contributions will see you paying 6% on earnings between £12,570 and £50,270 and 2% on profits above £50,270.
- Changes in NI will save £350 each year for the average self-employed worker earning £28,000
Still feeling a bit lost? The BBC (and many other financial businesses) have built a calculator tool that helps you work out what savings you might receive with the new NI cuts (note, this only works for those who receive a salary).
But, why are we still paying more tax?
Whilst cuts in NI seem like a step in the right direction, millions of us across the UK are still paying more tax overall due to changes in tax thresholds.
Tax thresholds are the income levels at which we start paying NI or income tax, they used to rise year on year in line with inflation. However, the NI threshold has been frozen at £12,570 until 2028. Freezing thresholds means that more people will begin to pay tax and NI as their wages increase each year.
According to the Office for Budget Responsibility this will create 3.2 million extra taxpayers by 2028 and 2.6 million more people will pay higher rates.
Moving forward
Like most changes in the economy there will be winners and losers from this NI change, and this is all dependent on how high your income is.
Do your research, make sure you’re on top of your take home income and find a way to budget effectively so that you don’t get caught out with changes in tax.