National Insurance cut: How much do we save

The government recently announced it will cut National Insurance by 2%, taking the rate of NI payable down from 10% to 8%. That should be good news, a rate cut usually means more money in your hand.

Unfortunately, this isn’t the case. The budget also changed the way tax is calculated, meaning you’re likely to be worse off.

The National Insurance cut

According to the chancellor, Jeremy Hunt, reducing NI from 10% to 8% will help 27 million workers. Based on an average salary of £35,000 per annum, each employee would save £450 a year.¹

In addition, a self-employed worker will benefit from a 2% NI cut, reducing their rate from 8% to 6%. For a self-employed person earning £28,200 a year, this represents a £350 annual saving.¹

It’s worth noting that millions of employees benefited from a reduction of NI in January 2024, reducing the rate from 12% to 10%. That means, the average worker on £35,000 a year would be £900 better off than last year.¹

Self-employed people also got, prior to the budget, a reduction of NI from 9% to 8%. With the latest reduction the average self-employed person will save £650 compared to last
year.

Tax changes

While a reduction in NI will save you money, the threshold for paying NI and tax has been frozen at current levels until April 2028. That means you’ll pay more tax and NI as your wage increases, negating the savings in NI rate reduction. Estimates suggest that, due to the freezing of allowances, 3.2 million people will move into the higher-rate tax band.¹

The Institute of Fiscal Studies (IFS) estimates that the average earner will, thanks to tax changes, save £340 per year and that anyone earning between £26,000 and £30,000 should be better off. However, time is the great equaliser. The same study found the average earner would be just £140 better off by 2027 and this only applies to people earning between £32,000 and £55,000 a year. Anyone earning under £26,000 or over £60,000 this year will find allowance freezes cancel out NI cuts and they will be worse off.¹

The overall tax rates

A recent OCED survey found that tax revenue as a percentage of GDP is highest in France, with an impressive 46.1%. The UK is middle of the table for G7 countries, with a 35.3% rate. It sounds positive but the reality is you are slowly becoming worse off. The study shows that, by the 2028/2029 tax year, the UK government will collect 37.1p of every pound created by the economy.¹ That’s higher than it has been for 80 years.

Sources

1. https://www.bbc.co.uk/news/explainers-63635185

All the information in this article is correct as of the date of publishing. The opinions expressed in this publication are those of the authors Euxton Mortgage Market. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.

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April 2024