The recent announcement by Chancellor Jeremy Hunt regarding cuts to national insurance has stirred conversations about how these changes will affect both employees and the self-employed. This blog aims to break down the details of the alterations and their consequences on individual finances, taking into account the context of previous tax adjustments.
National insurance is a tax paid on earnings by employees, employers, and the self-employed on their profits. It has a long history, initially introduced in 1911 to support workers facing job loss or needing medical treatment. Over time, it expanded to fund the state pension, and other benefits, and contribute to the NHS.
For employed individuals who are basic rate taxpayers, the national insurance rate will decrease from 12% to 10% on earnings between £12,570 and £50,270 starting January 6, 2024. This translates to an estimated annual saving of £450 for the average employee earning £35,400. Employees will pay 2% on income over £50,270.
Self-employed workers will experience a reduction in national insurance rates from April 2024. The Class 4 rate will decrease from 9% to 8% on earnings between £12,570 and £50,270. Furthermore, Class 2 national insurance, costing £3.45 a week, will be abolished from April, resulting in an estimated annual saving of £350 for the average self-employed worker earning £28,000.
Employers pay national insurance contributions per employee, with a rate of 13.8% for incomes above the secondary threshold (£9,100 to £50,270). There has been no announcement for changes in this regard.
The changes in national insurance will lead to varying savings depending on income levels. For employees, the average annual savings range from £148.60 for those earning £20,000 to £754 for those earning £60,000. Self-employed individuals will see higher savings for lower incomes, with a £253.70 annual saving for those earning £20,000.
Despite the immediate relief, experts caution that the overall tax burden may rise due to fiscal drag. Where increasing wages push individuals into higher tax brackets. As wages rise and income tax thresholds remain frozen, more people may find themselves paying higher taxes.
We encourage individuals to maximize tax-efficient savings and investments, such as ISAs and pensions, to counteract the potential impact of fiscal drag. Budgeting tips and the 50/30/20 rule are provided to help individuals assess their financial situation and prioritize spending.
The national insurance changes bring about both immediate relief and considerations for individuals. While the cuts aim to put more money in the pockets of employees and the self-employed, the broader economic landscape and future tax implications should be carefully monitored. As we approach the new year, staying informed about personal finances and making strategic decisions will be crucial in navigating the evolving tax landscape. If you’re in need of any advice feel free to book your 30 minutes free consultation service.