Millions of workers are set for a national insurance (NI) tax cut worth potentially thousands of pounds this financial year, but the savings may be limited.
Chancellor Jeremy Hunt used his Spring Budget to unveil a new NI cut, after already lowering the tax rate in his Autumn Statement.
Class 1 employee NI rates have dropped to 8% as of the new tax year since 6 April.
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Analysis by Quilter suggests the average worker could take home almost £900 more per year due to the changes.
“The chancellor’s additional 2p cut to National Insurance will mean that from the start of the new tax year, millions of hard working Britons will see more money in their pockets each month,” says Shaun Moore, tax and financial planning expert at Quilter.
“This change will certainly be a crowd pleaser.”
But it is not all good news.
Frozen income tax thresholds mean many of the savings could be offset if you are earning more and get pushed into a higher tax bracket, due to the impact of fiscal drag.
Here is how the NI cut could affect you.
What is national insurance?
Anyone over age 16 pays Class 1 NI on their employment income when they start earning more than £242 a week from one job or are self-employed and making a profit of over £12,570 a year.
These contributions help workers qualify for certain benefits such as the state pension and go towards funding public services such as the NHS.
Hunt unveiled a 2 percentage points drop in Class 1 NI rates during his 2023 Autumn Statement from 12% to 10% that started from 6 January 2024.
The rate has now fallen again since the start of the new tax year to 8%.
Will a national insurance cut help workers?
The more you earn, the more you pay in NI tax so a lower rate ultimately puts more money in your pocket.
Research by wealth manager Quilter suggests the upcoming cut, combined with the January reduction, could see a worker on the average salary of £34,944 take home an extra £17.21 a week, or £894.96 a year.
Before January, a worker on this average salary would have paid £2,684.88 based on a 12% Class 1 NI rate.
This then dropped to £2,237.40 when the rate fell to 10% and will be £1,789.92 at 8%.
That creates a combined saving of £894.96.
Those earning £50,000 could see annual savings of closer to £1,500.
| Salary | 12% | 10% | 8% | Total saving |
|---|---|---|---|---|
| £20,000 | £891 | £743 | £594 | £297.20 |
| £30,000 | £2,091.60 | £1,743 | £1,394.40 | £697.20 |
| £34,944 | £2,684.88 | £2,237.40 | £1,789.92 | £894.96 |
| £40,000 | £3,291.60 | £2,743.00 | £2,194.40 | £1,097.20 |
| £50,000 | £4,491.60 | £3,743.00 | £2,994.40 | £1,497.20 |
There is a downside though.
As wages grow, there is a bigger risk of being pushed into a higher tax bracket as allowances remain frozen, warns Moore, which could leave people worse-off.
“The Conservatives have been under significant pressure to shore up support as they head ever closer to the election, and whether this move will achieve this remains to be seen – particularly given the concerns around how much a cut will impact the NHS, schooling and other state support," he says.
"In addition, this change gives nothing to pensioners who do not pay national insurance."
Moore suggests that those who find themselves with a little extra spare cash each month as a result of the national insurance cut should consider how to make the most of it, adding: “You might wish to put it away to build a rainy day fund, or perhaps invest it in your pension to help boost your quality of life at retirement.”
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