How the National Insurance cut could increase your pension savings

See how you can use the National Insurance reduction announced in the Spring Budget 2024 to mitigate the income tax rise and maximise your pension contributions

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Lucie Spencer
Published: 01 May 2024 Updated: 30 Apr 2024

One headline measure announced in the Chancellor’s Spring Budget was the 2p cut to National Insurance (NI) contributions for both employees and the self-employed. This will save an average full-time employee on an annual salary of £35,000 more than £37 a month, or £449 a year.

Maximise your pension contributions

You could consider using the cut to alleviate the rise in income tax and maximise your retirement savings, without sacrificing take-home pay.

According to our figures, a 45-year-old earning £40,000 a year could benefit by more than £27,500 by age 67, without eating into their disposable income. A 35-year-old earning £60,000 could end up nearly £100,000 better off increasing the chance of an early or far more comfortable retirement.

These figures are for illustrative purposes. We assume that earners increase their monthly pension contribution by the amount they take-home is set to increase by after the 2p Budget cut to National Insurance is taken into account. That is then boosted by pension tax relief and grows at an annual investment return of 5%. This return is not guaranteed and could be more or less. It is also important to remember that pensions are a form of investment and you could get back less than you pay in.

The effect on income tax

Frozen and falling income tax allowances and thresholds mean that more people are paying more income tax, even though rates have not changed. This trend will continue until at least 2028, wiping out gains from the National Insurance cut for many taxpayers in a year or two from now. The overall direct tax burden is on the up.

One way to potentially mitigate against rising income tax is to pay into a pension, because contributions benefit from tax relief at your marginal (or highest) rate of income tax. Depending on your pension system, you will either get basic rate tax automatically and reclaim the rest if you are a higher or additional rate taxpayer. Or you will pay contributions out of gross income and get tax relief automatically.

Either way, the effect is much the same. You can legally and legitimately avoid paying income tax on a portion of your income while boosting your pension pot. This is why when one of our clients receives a pay rise, our financial advisers may talk to them about putting part or all of it into their pension.

Please remember that tax rates and reliefs depend on individual circumstances and are subject to change.

Speak to Evelyn Partners

We can show you how the National Insurance reduction could help to maximise your pension. We can discuss your wider financial circumstances, tax situation and plans for retirement.