The facts behind the national insurance cuts and how much better off you really will be
From April 6 many employees will benefit from the 2% reduction in class 1 national insurance contributions that was announced by the chancellor in the Spring Budget, so just how much better off is this going to leave you?
The measure introduced by the government cuts this rate of national insurance down to 8% from 10% and builds on Jeremy Hunt’s decision to decrease class 1 contributions by 12% to 10% from January 6 in his Autumn Statement last year.
You are eligible to pay class 1 national insurance if you are under the state pension age or earn more than £242 per week from one job, where your employer will deduct the contributions from your pay packet.
The impact of the National Insurance cut
According to the government’s figures, 29 million workers for the 2024/25 financial year will notice the difference due to the national insurance cut.
As a result of the 2% fall in contributions, an average employee who earns £35,400 per year will see a tax cut of over £450 per year.
It’s anticipated that the vast majority of employers will make the necessary payroll changes for the tax cut to be implemented from April 6, if that has not happened then employees will receive the benefits eventually.
Frozen tax thresholds mean not everybody benefits
While the national insurance cut decrease is positive news for some, not everybody will feel an advantage from the 2% cut, as tax thresholds were frozen by the government in 2021.
Originally the thresholds were to be placed on ice until April 2026, but his has been extended until April 2028.
This means that no matter what you earn there is a larger slice of your earnings that will go on tax, in economic jargon it’s a process that is known as the “fiscal drag”.
It’s good news for the chancellor, as especially recently salaries have significantly risen to keep up with sky-high inflation, meaning more money for the Treasury.
Some who were earning below the class 1 national insurance thresholds are likely to have been catapulted into being eligible to pay.
Although there are signs that the brakes are on wage growth, as the latest figures from the Office of National Statistics showed that the annual growth from regular earnings was 6,1% from last November to January, this is the fifth time in a row that it has slowed down.
The influential Institute of Fiscal Studies (IFS) produced a study on the 2% cut in national insurance and found that anyone who is earning more than £12,750 will benefit from the cut but many higher earners will gain more from it.
If you combine the successive reductions of class 1 national insurance in the last budget and from the one in autumn, then the tax cuts will be worth £900 on annual earnings of £35,000.
Yet overall the multi-year freezes on tax thresholds at a time of high inflation means that on aggregate the national insurance cuts just serve to hand back a portion of the money that has already been taken.
The IFS found that for every £1 extra in a worker’s pay packet from the tax cut, £1.30 will be handed back to the government due to the constant tax thresholds between 2021 and 2024, this increases to £1.90 in 2027.
Although the patterns of losses and gains can vary depending on earning levels.
In 2024/5 the net effect for an average earner factoring in all national insurance cuts and tax threshold freezes since 2021, will see a reduction in taxes of £340.
Around half of employees who earn between £26,000 and £60,000 per year will be better off than what they were, all others earning enough to begin paying national insurance will be worse off as tax rises eclipse national insurance cuts.
Fast forward to the 2027/28 tax year after three more years of the frozen tax levels, the average earner will see a rise in annual earnings of £140 considering all the changes over the previous seven years.
Overall around a third of employees will still be better off, this is the 9 million workers who are earning between about £32,000 and £55,000 per year.
But it's anticipated that tax-paying employees earning less or more than that are to lose out.
What do you get for paying national insurance?
There are many benefits that you receive for paying class1 national insurance, with perhaps the most important one being the state pension.
Other benefits include job seekers allowance and the contribution-based employment and support allowance, additionally, you qualify for maternity and bereavement support payments.