In his Autumn Statement, the Chancellor recently announced changes to national insurance contributions, affecting both employed and self-employed workers when they come into effect. We’ve dug a little deeper to outline the changes and what they will mean in practice for most workers.
What was announced:
For employees the rate of national insurance paid on earnings of between £12,570 and £50,270 a year will be cut from 12% to 10%.
This change will come into place from 6 January 2024, instead of at the start of the tax year in April as would typically be the case, and is expected to benefit 27 million employees.
For self-employed workers, the rate of so-called ‘class 4’ national insurance contributions (NICs) will be cut from 9% to 8%. This is the main rate paid on self-employed profits of between £12,570 and £50,270, and the Treasury says around two million self-employed workers will pay less national insurance as a result of this cut.
Additionally, for self-employed workers, mandatory ‘class 2’ national insurance contributions will be scrapped entirely, but you can still make voluntary contributions. Class two national insurance contributions are a set rate (£3.45 a week presently) which currently you have to pay on earnings of £12,750 and above – whilst those earning between £6,725 and £12,750 are entitled to the national insurance credits without having to pay the tax.
While class 2 contributions will be scrapped from 2024/25, those earning £6,725 and above will continue to earn national insurance credits as they do now without making payments and those earning less than £6,725 will still be able to make voluntary contributions to access certain benefits like the state pension.
What it means in practice:
So, currently, the basic rate of tax (the combined rate for national insurance and income tax) is 32%. This change will see it cut to 30%, meaning the average worker on a £35,400 salary should save £450 over the 2024/25 tax year.
However, last year the government announced changes to both national insurance and income tax thresholds, which determine when you start paying each tax. These thresholds have been frozen until April 2028, which mean millions more will be pulled into paying a higher proportion of their earnings in tax over the next few years.
So, the bigger picture is that the changes to NICs give back less than is being taken away. Roughly speaking, for each £1 retained by households through changes to NICs, an extra £4 is being taken away from households through the freezing of these tax thresholds. By the time the freezes to tax thresholds are due to end (2027/28), average households will be paying £249 a year more in direct tax overall as a result of all the changes since 2021.
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