What Do the National Insurance Changes Mean?

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In April 2024, the amount of National Insurance changes that both employees and self-employed people had to pay was reduced. This article will help you understand how these changes might affect you and your take-home salary.

Jeremy Hunt, the Chancellor, announced more changes to the National Insurance for employees and self-employed people in the Spring Budget on March 6, 2024.

The main National Insurance rate for employees is now 8%, down from 10% on April 6, 2024. This rate had been cut from 12% to 10% earlier in January.

On April 6, National Insurance contributions for self-employed people under Class 4 were also reduced, with the rate going down from 9% to 6%.

Also, Class 2 National Insurance contributions for self-employed people were completely removed in April, a change that has been planned since 2015.

These reductions in National Insurance payments should mean you keep more of your earnings in 2024. But it’s important to think about these cuts alongside previously announced tax increases, hidden taxes, and wage growth.

As salaries go up but income tax thresholds stay the same, more people will have to start paying tax or will move into higher tax brackets. This is known as ‘fiscal drag’.

In this article, we will explain the new National Insurance changes and how they might affect your salary. We will also give advice on budgeting and saving and discuss some ways you might be able to deal with tax increases and hidden taxes.

What are the new National Insurance changes?

The National Insurance contribution you make is based on your employment status – whether you are an employee or self-employed, and your income level:

  • For Employees: The main rate of National Insurance for employees has been reduced. It used to be 10% but from April 6, 2024, it has been lowered to 8%. This means if you are an employee, you now have to pay 8% of your earnings between £12,570 and £50,270 a year as National Insurance. This rate was previously reduced from 12% to 10% in January.
  • For Self-Employed (Class 4): If you are self-employed, the Class 4 National Insurance changes have also been reduced. The rate has decreased from 9% to 6% starting from April 6, 2024. So, if you are self-employed, you now have to pay 6% of your earnings as Class 4 National Insurance.
  • For Self-Employed (Class 2): The Class 2 National Insurance changes for self-employed individuals have been completely removed from April 2024. This means if you are self-employed, you no longer have to pay Class 2 National Insurance.

These national insurance changes should mean that you keep more of your earnings in 2024. However, it is important to consider these reductions in the context of previously announced tax increases, hidden taxes, and wage growth.

Why did the National Insurance changes?

With an upcoming general election and the Conservatives not leading in the polls, many anticipated that Jeremy Hunt would further reduce taxes in the Spring Budget.

There were speculations that the government might decrease income tax. However, some observers think that Hunt might have opted to lower National Insurance as it is less costly for the Treasury and advantageous for employees. This decision is in line with the Chancellor’s earlier stated intentions to encourage people to work.

Tax burden increasing despite National Insurance cut.

Interactive Investor, an investment platform, mentioned in a press release that despite the changes in National Insurance, both people earning less and more might find themselves at a disadvantage due to something called ‘fiscal drag’.

In their study, they said that people earning £20,000 would end up paying £81 more in tax in the year 2024-25. This is even after saving £149 because of the reduction in National Insurance from 10% to 8%.

This is happening because the income tax thresholds, which are the levels of income at which you start to pay tax, are not increasing with inflation. People earning £100,000 will pay an extra £1,064 in the same year. This is based on the idea that tax thresholds will increase in line with the Office for Budget Responsibility’s inflation prediction of 6.1% for the year 2023-24.

However, according to Interactive Investor, people earning an average income stand to benefit. A person earning £30,000 should save £119 due to the reduction in National Insurance from 10% to 8%, even after considering the impact of fiscal drag. Similarly, those earning £40,000 should save £319.

How can you mitigate the impact of fiscal drag?

Sarah Coles, the person in charge of Personal Finance at Hargreaves Lansdown, an investment platform, mentioned in an email to NerdWallet that it’s crucial to use all the tax benefits available. This includes savings and investments like ISAs and pensions that are tax-efficient, which means they can help you pay less tax when you’re saving for your future.

Since personal allowances aren’t going up, and interest rates on savings accounts might be at their highest, more people might end up having to pay tax on the interest they earn from their savings. That’s why it’s important to consider Individual Savings Accounts, or ISAs. ISAs give everyone a chance to save up to £20,000 each tax year without having to pay tax on it.

Putting money into your pension can also give you some tax relief. This can help you pay less tax and increase the amount of money in your pension fund for the future. 

FAQs

What are the new National Insurance changes? 

The main rate for employees has been reduced to 8% from 10%. For self-employed individuals, Class 4 contributions have been reduced from 9% to 6%, and Class 2 contributions have been completely removed.

When did these changes take place? 

These changes were implemented from April 6, 2024.

Who announced these National Insurance changes? 

The Chancellor, Jeremy Hunt, announced these changes in the Spring Budget on March 6, 2024.

How will these changes affect me? 

These changes should mean that you keep more of your earnings in 2024. However, it is important to consider these reductions in the context of previously announced tax increases, hidden taxes, and wage growth.

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