Changes to National Insurance Tax: What You Need to Know

Chancellor Jeremy Hunt has announced changes to national insurance tax starting from January 6, 2024, affecting both employees and self-employed workers. Here’s a breakdown of the key points: 

National Insurance Cuts for Employees: 

• Around 27 million employees earning between £12,570 and £50,270 will see a reduction in national insurance contributions from 12% to 10%. 
• This change took effect on January 6, 2024, allowing workers to benefit from the cut in their first pay of the year. 
• The overall basic rate of tax (national insurance and income tax combined) will decrease from 32% to 30%, resulting in potential savings of £450 for an average worker with a £35,400 salary during the 2024/25 tax year. 

Personal Tax Threshold Freezes: 

• Despite the national insurance cut, freezes on personal tax thresholds until April 2028 may offset the benefit for many workers. 
• This “fiscal drag” means that as earnings increase, a larger portion goes towards tax payments, impacting individuals across various income levels. 

Changes for Self-Employed Workers: 

• ‘Class 4’ national insurance contributions (NICs) for self-employed profits between £12,570 and £50,270 will see a reduction from 9% to 8%. 
• Approximately two million self-employed workers are expected to pay less national insurance, with an average saving of £350 for those earning £28,200 annually. 
• ‘Class 2’ NICs will be scrapped, providing simplification, but workers can choose to pay them voluntarily. 
• Earnings above £6,725 will continue to earn national insurance credits, while those below £6,725 can make voluntary contributions. 
• It’s important to note that NICs are based on profits, calculated by deducting expenses from self-employment income above a specified threshold. 

These changes aim to provide relief for workers but may be affected by the freeze on personal tax thresholds. Consider using online calculators to understand the impact on your specific situation. Stay informed about these adjustments to navigate your financial planning effectively. 

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