This article was first published on FT Adviser.
During the Autumn Statement the Chancellor announced the first ever cuts to National Insurance payments.
In his Autumn Statement on November 22nd 2023, Chancellor Jeremy Hunt abolished class two National Insurance payments paid by some 2mn self-employed people and reduced contributions for employed people by 2 percentage points to 10 per cent.
Hunt also cut class four National Insurance contributions by 1 percentage point to 8 per cent.
The last time we have seen a similar tax cut was the withdrawal of Boris Johnson’s health and social care levy last year.
As a result, more than 27mn people across the country will see an uptick in their take home pay, and they won’t have to wait long.
The cuts will be effective from January 6 2024 for employees, and April 6 2024 for the self-employed.
Let’s take a closer look at who these changes will impact.
The winners of this year’s Autumn Statement are employees, who have benefitted the most via a 2 percentage points reduction (from 12 per cent to 10 per cent) in the main rate of class one National Insurance, which is charged on earnings between £12,570 and £50,270.
The new 10 per cent rate is the lowest it has been since 2003 and provides an employee earning £35,000 a year with an annual saving of nearly £450.
However, the top rate of National Insurance – which is 2 per cent and applied to earnings over £50,270 – has not changed, therefore all employees earning over that amount will save a maximum of £754 a year.
Some employees will have increased their workplace pension contributions under salary sacrifice to counter the impact of the health and social care Levy in 2022, and they may now be considering returning their contributions to their previous level.
There is no change to the National Insurance rate of 13.8 per cent paid by employers. This will come as a huge disappointment to many businesses that are already battling the impact of wage inflation.
Some employers will also feel the effect of a near 10 per cent increase in the national living wage.
Unusually for a Conservative government, the National Insurance cut handed to the self-employed was not as generous as that given to employees, meaning the rates between the two types of worker are more closely aligned than ever.
The 1 percentage point reduction in class four National Insurance contributions will save a sole trader up to £377 in the next tax year.
In addition, the Chancellor has announced that class two National Insurance – a weekly sum paid by the self-employed – will be abolished from April 2024, saving a further £3.45 a week.
This brings the total savings for the self-employed to nearly £560 a year.
Those whose state pension entitlements are reliant on class two National Insurance contributions should have their entitlements protected under the new rules.
The removal of class two is a welcome simplification to the National Insurance system.
However, given the number of different National Insurance rates, and the organisational complexity it creates at HMRC, it is still hoped that one day a Chancellor will be bold enough to merge National Insurance with Income Tax to make the system more transparent and easier to operate.
The rates of National Insurance for apprentices have moved in line with employees’.
Some apprentices will benefit from the increased minimum apprentice wage from £5.28 an hour to £6.40 an hour.
State pensioners do not pay National Insurance and will not benefit from the rate changes, but they weren’t forgotten entirely.
The Chancellor confirmed that he will honour his commitment to the triple lock in full.
The new full state pension will therefore increase by 8.5 per cent to £221.20 a week from April 2024 (or £169.50 a week for those who reached state pension age before April 2016).
Don’t be fooled by headlines though – tax liabilities are still increasing.
While these cuts to the National Insurance rates will provide some relief to those in work, set against the backdrop of frozen tax thresholds and allowances in a time of high inflation, many will continue to see their overall tax liability increase year on year.
The Chancellor has been able to make some headlines by cutting rates of National Insurance, but the so-called ‘fiscal drag’ will mean that UK plc is still feeling the weight of our ever-increasing tax burden.
He may, though, be keeping some pre-election tax cuts up his sleeve for the 2024 Budget.
If you have any queries then please get in touch with Sam Dewes.