Insights

Intense pressure to cut taxes and help with the cost of living has led to the Chancellor Jeremy Hunt reducing national insurance for some taxpayers. Many of the news headlines reported that this was a financial boost for working people, but in reality, only a small segment of taxpayers will see any benefit. In addition, employers, many of whom are small business owners, were excluded from the cuts to NICs and face much higher costs.

The 2024 Spring Budget included cuts to the rates of national insurance (NICs)for employees and self employed workers as follows.

• Reduced national insurance rates for employees

The main rate of Class 1 employees’ NICs is being reduced from 10% to 8%. This is a significant reduction, having already been reduced from 12% to 10% in January 2024 following the last Autumn Statement. It means that employees’ NICs have been cut by 4% in the last 6 months.

How will NIC cuts save employee tax?

The government has estimated that around 27 million working people will see an increase to take home pay as a result of this policy. The reality is slightly different however because the fiscal drag effect of frozen personal tax allowances and no changes to the NIC thresholds, means a large proportion of these savings will vanish.

Reality check – who saves tax when employee NICs are cut?

Our analysis highlights the winners and losers of the reduced NICs policy:

Workers earning £15,000 will pay £388.80 more tax
Cutting NICs to 8% produces an annual liability of £680.40 whereas if NI remained at 12% and the personal allowance increased in line with inflation, the corresponding tax liability would be £291.60.

Compare this to a worker earning £25,000 who pays £33.72 more tax, highlighting the clear effect of fiscal drag in bringing more people into the income tax regime.

Workers earning £35,000 will save £366.28 in tax
Cutting NICs to 8% produces an annual tax liability of £6,280.40 whereas if NICs remained at 12% and the personal tax increased in line with inflation, the corresponding tax liability would increase to £6,646,68.

The same effect is seen amongst workers earning £50,000 who save £966.28 with the new lower NIC rate.

Higher rate taxpayers earning between £75,000 and £100,000 are £1,146.17 worse off on the lower rate.

• Reduced NICs for self-employed workers

The 2023 Autumn Statement included a reduction in the main rate of Class 4 self-employed NICs, from 9% to 8% from January 2024, and the abolition of Class 2 NICs. As of April 2024, as announced in the Spring Budget, there will be a further 2% cut to the self-employed workers’ national insurance rate, bringing it down to 6%. This becomes effective from 6 April 2024 and will result in a £650 saving for the average self-employed person earning £28,000.

Businesses paying minimum wage see sharp employment cost increase

Before the latest Budget, there were numerous reports highlighting concerns among some small business owners about forthcoming increases to the national living wage (NLW) and national minimum wage (NMW). The 2024 Spring Budget did not provide any financial relief to these worried employers in the form of NIC reductions.

From 6 April 2024, employers who have staff paid at the NLW will now pay an additional £1.02 per hour per employee in higher wages plus an additional 13.8% of the total in employer’s NIC. This policy will have the greatest impact on the business owners who employ a large number of workers on the NLW. For other employers, it will be ‘business as usual’.

If you would like help with your annual self-assessment tax return or business tax compliance obligations, please contact partners@rjp.co.uk.