On 6 January, the Chancellor’s 2% cut to National Insurance (NI) contributions comes into effect for eligible UK workers. As announced at the recent Autumn Statement, this cut sees the main rate of primary Class 1 NI contributions fall from 12% to 10%.
What is National Insurance?
NI contributions are mandatory for those age 16 or over who are either:
- an employee earning more than £242 a week from one job
- self-employed and making a profit of over £12,570 a year.
These contributions enable workers to qualify for certain benefits, including the State Pension and are a cornerstone of funding for crucial public services like the NHS.
At first glance, the 2% savings look impressive
Our calculations show the 2% NI reduction will save the average UK worker* £447.86 over a year, or £8.61 per week. Here are the average savings for the National Insurance cut:
|
12% |
10% |
Saving |
|
|
£30,000 |
£2,091.60 |
£1,743.00 |
£348.60 |
|
£34,963 (average salary*) |
£2,687.16 |
£2,239.30 |
£447.86 |
|
£40,000 |
£3,291.60 |
£2,743.00 |
£548.60 |
|
£50,000 |
£4,491.60 |
£3,743.00 |
£748.60 |
|
£100,000 |
£5,518.60 |
£4,764.60 |
£754.00 |
However, frozen income tax means the real saving is much smaller
On the face of it, this seems a relatively generous cut that will help put more money back in people’s pockets. However, separate analysis reveals that despite the NI cut, UK workers are just £2.68 a week better off than they would have been had tax thresholds not been frozen.
This is due to something called ‘fiscal drag’ – when tax thresholds are frozen so that people's taxable income increases without the published tax rates actually increasing. Effectively, more taxpayers are 'dragged' into paying tax, or paying tax at a higher rate.
If frozen income tax bands had increased by just 2% over the past four years, someone earning the average salary of £34,963* would be a further £308.40 better off. If you take this amount off the headline saving in NI of £447.86, workers are only £139.46 a year or a meagre £2.68 a week better off following the NI cut than they would have been had income tax thresholds not been frozen.
Rachael Griffin, Quilter tax and financial planning expert, says:
“The Chancellor’s 2% cut to National Insurance was the big ‘rabbit out of the hat’ moment at the Autumn Statement, providing UK workers with some long-awaited respite via a boost to their monthly take home pay from this month. However, while a £447.86 yearly top up for the average worker will be welcomed, it will hardly be life changing.
“Getting more money into people’s pockets is key, and thawing the frozen income tax thresholds could help considerably. With an election rapidly approaching, the Spring Budget is likely to be the Chancellor’s final opportunity to make any vote-swaying announcements and income tax is widely rumoured as being top of the agenda to curry favour with voters – particularly younger cohorts.
“Income tax thresholds are currently frozen until 2028 so a reduction alongside the cut to NI could bring some much-needed relief to UK workers who have borne the brunt of the cost-of-living strain. The Government’s adoption of a stealthy fiscal drag approach has resulted in a huge number of UK workers being pushed into higher income tax bands as wages have risen rapidly in an attempt to keep up with inflation. Recent figures from the OBR, for example, show there will be an estimated 7.5 million higher rate taxpayers by 2028/29 if thresholds remain frozen, almost double the 3.8 million there were in 2019/20.
“For the time being, the uptick in monthly take home pay following the NI cut will help ease the strain on people’s personal finances - albeit only marginally. Though income tax has made the headlines recently, there is no guarantee that the government will make changes, so it is important that people plan their finances based on the current circumstances. For those on the cusp of a higher tax band or looking to lower their income tax band in general, seeking professional financial advice and exploring the options available, such as paying more into their pension where possible, could be highly beneficial.”
Please be aware that tax treatment varies according to individual circumstances and is subject to change.
* ONS median gross annual earnings figure for full time employees - Employee earnings in the UK - Office for National Statistics (ons.gov.uk)