The Chopping Block: Understanding The Impact Of The New Bill On Insurance Coverage

The National Insurance Contributions (Reduction in Rates) Bill 2023-24, introduced in November 2023, has cut the national insurance rate for employees from 12% to 10% as of January 2024, with a further reduction to 8% from April 2024. Self-employed workers have also seen a reduction in their national insurance rate from 9% to 8% in April, with an additional cut to 6% from April 2024. These changes are expected to save the average worker £450 per year, or £900 when combined with the previous year's cut. The bill has been projected to reduce tax receipts by an estimated £9.4 billion in 2024/25, rising to £10 billion by 2028/29.

National Insurance Contributions (Reduction in Rates) Bill 2023-24

The National Insurance Contributions (Reduction in Rates) Bill 2023-24 was introduced on 23 November 2023 and became an Act of Parliament on 13 December 2023. The bill implements three key changes to National Insurance contributions (NICs) in the UK:

• A cut in the main rate of NICs paid by employees ('primary Class 1 NICs') from 12% to 10%. This change took effect from 6 January 2024.
• A reduction in the main rate of NICs for the self-employed ('Class 4 NICs') from 9% to 8%. This change was implemented on 6 April 2024.
• The removal of the requirement for self-employed individuals to pay the flat-rate NICs charge ('Class 2 NICs') when their annual profit exceeds the 'lower profits threshold' (currently £12,570). This change also came into force on 6 April 2024.

These measures are expected to have a significant impact on public finances, with the Office for Budget Responsibility (OBR) estimating a reduction in tax receipts by £9.4 billion in 2024/25, rising to £10.0 billion by 2028/29. However, the tax cut is anticipated to benefit around 27 million employees and over 2 million self-employed individuals.

The average annual gain for basic-rate taxpayer employees is estimated at £304, while higher-rate taxpayers could see an increase of £647, and those paying the additional rate may gain £707. For the self-employed, the average annual gain is estimated to be £117 for basic-rate taxpayers, £322 for higher-rate taxpayers, and £358 for additional-rate taxpayers.

It's important to note that these changes to National Insurance contributions should be considered in conjunction with previously announced tax rises, 'stealth' taxes, and wage growth. While lower National Insurance contributions may result in higher take-home pay, the impact of fiscal drag, where income tax thresholds remain frozen, can pull more people into paying taxes or push them into higher tax bands as their wages increase.

National Insurance cuts for employees

National Insurance is a tax on earnings paid by employees, employers, and the self-employed. It was introduced in 1911 to support workers who had lost their jobs or needed medical treatment.

In the 2024 spring budget, Chancellor Jeremy Hunt announced a two-percentage-point cut to National Insurance, following a previous cut in January. This article will outline how these changes will affect employees.

The rate of National Insurance Contributions (NICs) that employees pay depends on their earnings. From 6 January 2024, the rate was reduced from 12% to 10% on earnings between £12,570 and £50,270. From 6 April 2024, this rate dropped further to 8%.

The amount employees will save from the National Insurance cuts depends on their salary. The Treasury estimates that the average worker will save £450 a year from the April cut, which, combined with the January cut, will amount to £900.

For someone earning £25,000 a year, the changes will save them around £249, rising to £449 for someone earning £35,000, and £754 for higher and additional-rate taxpayers.

An employee earning £50,000 will pay £3,743 in National Insurance after the change, saving £748.60. A senior nurse with five years of experience on £42,618 will receive an annual gain of £600. An average teacher on £44,300 will receive an annual gain of over £630.

Employees should see an increase in their take-home pay in January and April as their employers update their payroll systems. For basic-rate taxpayers, the combined income tax and National Insurance rate will be 30%, the lowest since the 1980s.

The government has implemented these changes as part of a long-term plan to grow the economy. Chancellor Jeremy Hunt has also expressed his intention to scrap National Insurance entirely, as earnings from employment are taxed twice, with both income tax and National Insurance, whereas earnings from other sources are only taxed once with income tax. However, removing National Insurance entirely will take time, and no timetable has been announced yet.

National Insurance cuts for the self-employed

In the 2023 Autumn Statement, Chancellor Jeremy Hunt announced plans to cut National Insurance rates for the self-employed, effective from 6 April 2024. These changes are expected to reduce tax receipts by over £9 billion annually and will impact around 2 million self-employed people.

Class 2 National Insurance

Class 2 National Insurance, a flat-rate compulsory charge of £3.45 per week, will be abolished from April 2024. This change will save the average self-employed person £192 per year and will apply to those with annual profits above £12,570. Previously, these contributions were necessary to receive state pension entitlement. However, from April 2024, individuals with profits above the 'small profits threshold' of £6,725 will have their National Insurance account credited as if they had paid Class 2 contributions.

Class 4 National Insurance

The main rate of Class 4 National Insurance, paid on profits between £12,570 and £50,270, will be reduced from 9% to 8%. The rate for profits over £50,270 will remain unchanged at 2%. This reduction will result in an average annual saving of £117 for basic-rate taxpayers, £322 for higher-rate taxpayers, and £358 for additional-rate taxpayers.

Combined Impact

The average self-employed taxpayer will save £350 per year due to these changes. However, it's important to consider these cuts alongside previous tax rises, wage growth, and the concept of 'fiscal drag'. While the cuts provide relief, the freezing of income tax thresholds means that more people will be paying tax and progressing into higher tax bands as their wages increase with inflation.

Impact on taxpayer finances

The National Insurance Contributions (Reduction in Rates) Bill 2023-24, introduced in November 2023, is expected to have a significant impact on taxpayer finances. The bill, which received Royal Assent in December 2023, implements three main changes:

• A cut in the main rate of NICs paid by employees from 12% to 10%, effective from January 6, 2024.
• A cut in the main rate of NICs paid by the self-employed from 9% to 8%, effective from April 6, 2024.
• The removal of the requirement for the self-employed to pay the flat-rate NICs charge when their annual profit exceeds £12,570, effective from April 6, 2024.

These changes are expected to reduce tax receipts by an estimated £9.4 billion in 2024/25 and rise to £10.0 billion by 2028/29, according to the Office for Budget Responsibility (OBR). The OBR also estimates that 27 million employees and over 2 million self-employed individuals will benefit from these changes.

The average worker is expected to save £450 annually due to the cuts, with the Treasury projecting a total savings of £900 when combined with the previous year's cut. However, the impact on taxpayers' finances may vary depending on salary and employment status. For instance, someone earning £35,000 per year will save £785 annually due to the NI cuts, but this saving is reduced by over half due to frozen tax bands.

While the NI cuts provide financial relief to taxpayers, it is important to consider the potential impact on public finances. The OBR notes that the tax cut offsets only a small portion of the personal tax rises announced in the 2021 Spring Budget and the 2020 Autumn Statement. The freeze in tax allowances and thresholds, a form of 'fiscal drag', will result in higher tax revenues as more of taxpayers' income is taxed at higher rates. By 2028/29, these personal tax rises are estimated to generate £44.6 billion in revenue.

Therefore, while the National Insurance Contributions (Reduction in Rates) Bill provides short-term financial benefits to taxpayers, the long-term impact on public finances and government revenue is a crucial consideration for policymakers.

Changes to taxpayer allowances and thresholds

The personal tax allowance, which is the amount of income one can earn before paying income tax, has been frozen at £12,570 for the tax years 2023/24 and 2024/25. This is the threshold at which individuals become liable to pay tax at the higher rate. The tax-free allowance will be deducted from the total amount earned in a year, so tax is paid only on the balance. The allowance can be increased if one claims Marriage Allowance or Blind Person's Allowance.

The basic rate of income tax is 20% on income between £12,571 and £50,270. The higher rate is 40% on income between £50,271 and £125,140, and the additional rate is 45% on income over £125,140. These rates are unchanged from 2022/23.

The National Insurance primary threshold was increased to £242 per week, £1,048 per month, or £12,570 per year, for 2023/24. The secondary threshold is set at £175 per week, £758 per month, or £9,100 per year. The upper earnings limit is set at £967 per week, £4,189 per month, or £50,270 per year.

The National Insurance contribution rate for employees was 12% on earnings between the primary threshold and upper earnings limit from 6 April 2023 to 5 January 2024. From 6 January 2024, the main rate was cut to 10%. Earnings above the upper earnings limit are charged at a rate of 2%. For employers, the rate remains unchanged at 13.8% on earnings above the secondary threshold.

The National Minimum Wage is the minimum hourly pay that workers are entitled to by law, depending on their age. The National Living Wage is for employees aged 23 and above, and this rate will be extended to employees aged 21 and above from April 2024.

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