National Insurance cut will save around £400 for 1,000,000s of us
Millions of us will have received a fatter pay packet this month, thanks to a cut in National Insurance that will save average earners hundreds of pounds.
Chancellor Jeremy Hunt says that the cut, from 12% -10%, will be worth £450 to the average earner in the UK. Announcing the move in the Autumn Statement, he said it would save the average nurse £520 and the average policeman £650 annually.
Hunt also brought the move in early, starting from January 6 rather than the beginning of the new tax year in April, so that ‘people can see the benefit in their payslips at the start of the new year’.
But despite the savings from the National Insurance cut, some experts say that for many of us the taxes we pay on our earnings will rise not fall, in 2024.
That is because the government has frozen the thresholds and allowances for National Insurance and income tax, creating an effective tax rise.
So, will you pay more – or less – tax this year thanks to the government’s changes? The answer may be more finely balanced than you think.
New Year Cheer
National Insurance can be a confusing tax, but provided you earn more than £12,570 a year you should be able to see a small improvement in your pay in this month’s payslip.
For those earning the least, however, there will be no change.
That is because the tax that has been cut – Class 1 NICs – is paid at different rates depending on how much you earn.
Only the middle band has changed. Employees will continue to pay no National Insurance on the first £242 of weekly income and 2% NICs on earnings above £967 a week.
The change comes on weekly income between £242 and £967, where employees were paying £12 of every £100 in National Insurance but will now only pay £10.
The benefit you get from the tax cut will therefore depend on the salary you earn, but those earning more than £967 a week, or £50,270 a year, will not see any greater savings than those earning this figure, as the 2% contribution on earnings above that level remains the same.
Sian Steele, head of tax at wealth management firm Evelyn Partners, says that the cut will ‘bring a bit of new year cheer for millions at a time when there are many pressures on household incomes’.
However, she also notes that the extra bit of income should be put in the context of a ‘steady rise’ in the tax burden we are all bearing.
Those who are self-employed will also have to wait longer for their tax cut.
They will no longer have to pay Class 2 NICs after the beginning of the new tax year, which will save £186 a year on average.
Annual savings from the NICs cut, by salary
Salary vs Savings
Salary £12,570 or less = £0 savings
£15,000 = £48.60
£20,000 = £148.60
£35,000 = £448.60
£50,000 = £748.60
£50,270+ = £754
Source: Institute for Fiscal Studies (IFS)
The other type of National Insurance contributions for self-employed people, Class 4, will also be cut by one percentage point, from 9% to 8%,
This rate applies to the same band as the main Class 1 applies, to profits of between £12,571 and £50,270.
According to investment website Hargreaves Lansdown, 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 each year from April 6.
Giving with one hand…
Gains from the new tax rates work out at around £14 a week for a junior doctor, or £11 a week for a senior nurse – but the government’s decision not to raise the thresholds at which we pay tax cancels out much of this gain.
The government’s refusal to raise both the threshold at which people start to pay income tax, and the point at which higher taxes kick in, despite rising inflation, creates a phenomenon known as ‘fiscal drag’ which means most of us end up paying more tax and feeling poorer.
Overall, according to economists, we will pay more personal tax in the coming tax year than if NI rates were remaining unchanged and income tax thresholds not frozen.
I need a side hustle to top up my nursing wages
Paediatric nurse Becky Rider has recently become a single parent to two older teens and works in the A&E department at Doncaster & Bassetlaw Teaching Hospital.
The cost-of-living crisis has left her, like many, counting the pennies.
‘Money is tighter and certainly since the recent change in my family circumstances I have felt increased financial pressure,’ she tells Metro.co.uk.
‘The recent news that inflation has unexpectedly increased again is another blow, and the cost of living is still very much being felt. Energy costs and food prices are still a huge challenge.’
Becky has turned to a ‘side hustle’ to top up the cash she earns from nursing, making around £1,000 a month selling Avon products.
‘My NHS wage pays for all my bills and my Avon money pays for anything outside of that, whether it’s renewing my car insurance, affording Christmas or treating myself and my children,’ she says.
Without this money, she says that she would be left with very little after living costs – and adds that it makes more difference to her than the National Insurance tax cut, which will save her £400 a year (just under £7.70 a week)
A typical full-time nurse, with a salary of £38,900, will make an annual gain of £520 from the tax cut. Becky’s is a little lower than this as she works 30 hours a week, where a full-time NHS employee works 37.5 hours.
‘Reducing National Insurance is a step in the right direction, but it’s not enough to make a significant difference to the financial pressure many people are experiencing and have been experiencing for some time now,’ she says.
‘I believe that most people need a noticeable difference in their monthly income,’ Becky adds.
Poorest hit hardest
There will be individual winners and losers, depending on earnings. Those at the lower end of the salary scale are hardest hit. Calculations from Helen Miller, deputy director of the Institute For Fiscal Studies, suggest anyone earning less than £29,000 will find the frozen thresholds this tax year more than cancel out the NICs saving.
Middle earners will still see a net benefit, but it will not be large, while those at the top end will also lose out. ‘An employee on average full-time earnings of £35,000 per year will gain about £130 more from the NICs cut than they lose from this April’s freeze in thresholds,’ Miller says.
‘Those with slightly higher earnings will gain a bit more than this, whereas tax-paying employees earning less than £29,000 will almost all lose out.’
A £130-a-year benefit roughly equates to £2.50 a week extra in total – not enough to buy a Sainsbury’s Meal Deal.
More tax to come
While the NICs change will have been seen in pay packets by now, other changes affecting how much tax we pay will come at the start of the tax year in April – and many of these will further increase how much tax we pay.
Changes include a cut to the dividends we can receive for investments tax-free, from £1,000 to £500. A similar cut to the capital gains tax allowance from £6,000 to £3,000 means you’ll be taxed more if you profit when disposing of an asset such as a second home or investment. The allowance was already cut from £12,300 in the 2022/23 tax year.
Councils are also expected to be granted the right to put up local taxes by another 5%.
So, although you may feel a little cheered at the prospect of a few pounds extra in your pay packet this month, it is worth remembering that the tax cuts being given out with one hand may well be being taken away with the other.
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