Millions to benefit from National Insurance cut from 6 January

The first tax cut of 2024 will take effect tomorrow, 6 January, with National Insurance (NI) falling from 12% to 10%.

The cut was announced by the chancellor in last year’s Autumn Statement. About 27 million people stand to benefit from the lower National Insurance rate, with high earners saving up to £754 a year. 

Sarah Coles, head of personal finance at the wealth manager Hargreaves Lansdown, says the tax cut is unlikely to be the last one of the year. “With a Budget on 6 March, and a general election looming, several cuts are thought to be in the running.”

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For example, we could see income tax and inheritance tax cuts as a sweetener for voters before they head to the ballot boxes later this year. However, we could also see tax rises this year. 

We explain how the National Insurance rate drop works, who is affected, and how much you could save.

How the National Insurance cut works 

Currently, National Insurance is charged at 12% for earnings between £12,571 and £50,271 a year, and 2% on anything above that.  

But the 12% rate will fall by 2 percentage points to 10% from Saturday, 6 January. The move will save someone earning £30,000 a year £349. An employee on a £40,000 salary will save £549, while someone earning £50,000 will see a £749 boost to their tax-home pay.

Anyone earning more than £50,270 a year will save the maximum of £754.

Coles comments: “The National Insurance cut isn’t to be sniffed at. It will cut £149 off the tax bill of someone earning £20,000 [all the way up to] £754 for anyone earning over the higher-rate tax threshold.”

The average employee will save about £450 a year. The move will not impact those above the state pension age as they do not pay National Insurance.

How much will the National Insurance cut save you? 

This is the amount of money you could save each year depending on your salary.

Source: Quilter

What about National Insurance for self-employed workers? 

Jeremy Hunt also used his Autumn Statement to scrap class 2 National Insurance contributions and cut class 4 ones, which will help 2 million self-employed workers. But they will have to wait a little longer for this, as it doesn’t come into effect until the start of the new tax year in April. 

Class 4 contributions - the main rate of National Insurance contributions for self-employed people - will be lowered by one percentage point, from 9% to 8%. This applies to profits of between £12,570 and £50,270. 

This will cut an average of £117 in tax for basic-rate taxpayers, £322 for those on the higher rate, and £358 for additional-rate taxpayers.

So, the National Insurance changes are good news then? 

Well, they will save millions of people money and essentially give them a pay rise - but when you look at the tax cut in relation to the frozen income tax thresholds and fiscal drag, it is perhaps not as generous as it first appears.

Frozen allowances are set to cost high earners thousands of pounds. The government froze personal tax thresholds in March 2021 in an effort by the Treasury to balance the country’s books but this has created a fiscal drag where people find themselves in higher-than-expected tax bands as wages rise.

James McCaffrey, spokesperson for TotallyMoney comments: “Income tax thresholds aren’t rising at the same rate as inflation - and will remain frozen until 2028. The result is that those receiving pay rises might find themselves slipping into higher tax thresholds and paying more on their earnings. Over the next few years, it’s estimated that nearly 4 million more people will start paying income tax, while 3 million will be subject to higher rates.

“Real household disposable incomes are continuing to slide and while a cut to National Insurance will be of some benefit, it’s unlikely to cover the impact of the soaring cost of living and the freeze to income tax.”

According to calculations by the wealth manager Quilter, a worker on the average salary of £34,963 will take home an extra £8.61 a week due to the National Insurance cut, but due to frozen tax bands and fiscal drag the real benefit is significantly smaller. Had income tax bands increased by just 2% over the past four years, someone earning this same average salary would be a further £308.40 better off. If you take this off the headline saving in National Insurance, it leaves a saving of just £139.46 over the year or a meagre £2.68 a week.

You may also be thinking a change to National Insurance sounds familiar, and are confused about whether the government’s policy is to raise or lower the rate. That’s because tomorrow’s change is the third change in less than two years - it was hiked in April 2022, which was then reversed in November of the same year.