Budget: Hunt cuts another 2p from National Insurance from this April

The Chancellor of the Exchequer has cut 2p off the Class 1 rate of National Insurance contributions for employees, from 10 per cent to 8 per cent. The rates for the self-employed will also fall by another 2p to 6 per cent, and the changes will be implemented in the new tax year.

The median salary in the UK is currently around £28,000 and this 2p off Class 1 NICs to 8 per cent will add £309 a year to the pay-packet of someone earning that amount.

Someone earning £40,000 a year would gain £549, and employees on a salary greater than £50,270 – in other words, higher and additional rate taxpayers - would see their annual disposable income rise by £754.

Toby Tallon, Tax Partner at professional services and wealth management group Evelyn Partners, says Jeremy Hunt might be taking a certain amount of political risk by opting again for a NIC cut to follow the one that arrived in pay-packets in January:

“A further NIC reduction is evidently cheaper than a similar cut to income tax and as it prioritises earned income over unearned income it can be billed as a growth strategy that encourages work.

“However, by doubling down on his Autumn Statement NIC cut, Mr Hunt is favouring younger cohorts over older, with those over state pension age not subject to NI at all.[1] As it also has no benefit to those earning income from other sources or being taxed on their assets, it does mean there is little to celebrate for the older constituency that Conservative Chancellors have traditionally courted.

“Taken together with the January cut from 12 per cent to 10 per cent, this move on NI amounts to a total tax cut – compared to the situation in 2023 - of an annual £618 for a median earner and £1,508 for higher earners, or £51.50 a month and £125.60 respectively.

“That would be a reasonably significant tax cut in isolation, but it is swimming against a rising tide of taxation due to frozen or falling allowances and thresholds, not just for income tax but also capital gains, dividend and inheritance taxes.

“The drop in NICs will provide temporary respite against that rising tax burden, but will just push down the road by a year or two the point at which the overall tax situation for most people starts to feel more onerous again. According to independent analysis, this Budget won’t prevent the overall tax burden rising to its highest levels since the second world war by 2028.[2]

“In a high and rising tax environment, households might want to consider whether they are using their entitlements and allowances, or perhaps where suitable making pension contributions, so they are proactively managing their own tax burden to the extent they can.  

“As we near the end of the tax year when many tax exemptions, as well as ISA allowances, expire, it will pay for some households to give this some attention. Particularly salient for investors with assets outside tax wrappers, is that for the second year in a row, the capital gains tax exemption and the dividend allowance will halve, to £3,000 and £500 respectively on 6 April.”

NOTES

[1] Unless self-employed and pay Class 4 contributions.

[2] IFS, February 2024.