In Jeremy Hunt’s spring 2024 budget he announced plans to reduce national insurance by 2p marking another significant decrease in employment taxes within one year.
This decision follows his previous move to lower national insurance rates by 2p during last year’s autumn statement which we reported on in December.
The extra reduction in national insurance should provide an annual saving of £450 for the average earner.
Adding todays 2 percent reduction to the earlier decrease in Decemeber 2023 translates to a one third decrease in the main rate of national insurance, resulting in an average worker earning £35,400 receiving a tax cut of over £900 compared to the previous year.
The chancellor aims to give a 2p NI cut as an alternative to increasing income tax bands or reducing rates of income tax.
The national insurance contributions reduction is for the class 1 type of national insurance which is paid by employed people working under PAYE and for class 4 which is paid by the self employed.
Cutting national insurance (NI) instead of focusing on income tax could incur a cost of approximately £10bn to the government and provide benefits to around 27 million employed workers.
Has self employed national insurance been cut as well?
The Autumn 2023 statement brought in a reduction of 1 percentage point in the main rate of class 4 NIC’s for self employed individuals.
Today the chancellor announced a further decrease of 2 percentage points from 8% to 6% of the NIC’S main rate starting in April 2024 benefitting around two million individuals who are self employed.
This change will result in total savings for the average self employed person earning around £28,000 of over £650 compared to last tax year.
The class 4 savings are in conjunction with the elimination of the obligation to pay class 2 NICs, which was announced during the Autumn statement.
What are the new class 1 national insurance rates?
Class 1 national insurance contributions (aka primary contributions) are paid by individuals employed under PAYE with the rate being reduced from 10% to 8% from April 2024.
For qualifying workers you should see the benefit of the reduced class 1 rate from 6 April 2024 onwards which is when the 2024/2025 tax year begins.
The drop in the class 1 rate is applied automatically by employers so you don’t need to do anything to start paying less.
On review employed workers will see a decrease in the class 1 NIC rate from 12% to 8% within a one year period which goes someway to help reduce the overall tax burden for some employed people.
Will the class 1 reduction affect my pension?
Class 1 NIC’s are used by the government to fund state pension payments and some other benefits.
The reduction in the class 1 NIC rate will not impact your entitlement to claim or the value of your state pension or any applicable benefits.
National insurance credits
With national insurance in the news it’s a good time to check your national insurance record to make sure there are no gaps in your record.
If you find you have gaps in your NI record you can sometimes use national insurance credits to make up the deficit.
It’s crucial for those who would otherwise fall short of a full state pension to claim national insurance credits where possible.
Claims for certain national tax credits have the potential to be retroactively applied for several years.
One NI credit, often referred to as “grandparents credits,” can be backdated for almost a decade.
Another credit, aimed at military spouses, can be claimed all the way back to the mid-1970s.
Our national insurance credits guide gives you some more information on who is eligible and how to claim NI credits from the DWP.
Pension credits are also increasing in the 2024/2025 tax year which is good news for those entitled to or already claiming pension credits.
You can find out more about pension credits and the rates being paid in our pension credit guide for the 24/25 tax year.
Income tax rates and bands stay the same
As expected the chancellor has kept income tax rates and bands the same maintaining the freeze in personal tax thresholds.
The current plan is to keep income tax rates and bands as they are currently until April 2028
By freezing the income tax thresholds, a consequence will be that as individuals’ wages increase, they will fall into higher tax and National Insurance (NI) brackets.
The Office for Budget Responsibility (OBR), an independent evaluator of the government’s economic strategies, predicts that by 2028, an additional 3.2 million individuals will become taxpayers, and 2.6 million more people will be subject to higher income tax rates.
