Chancellor Jeremy Hunt has announced that National Insurance contributions will be cut by a further 2p in the Spring Budget.
From 6 April, employees’ National Insurance contributions will be cut from 10% to 8%, while self-employed National Insurance will be cut from 8% to 6%.
The move will provide the average employee with an additional £450 a year or £359 for someone self-employed.
The Chancellor said that when combined with the previous 2p cut announced in the Autumn Budget, 27 million employees will benefit from an average tax cut of £900 a year.
Toby Tallon, tax partner at Evelyn Partners, said: “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 National Insurance cut, Mr Hunt is favouring younger cohorts over older, with those over state pension age not subject to NI at all. 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.”
Tallon said that while in isolation, the tax cut could be viewed as “reasonably significant”, it comes against a backdrop of rising taxation due to frozen or falling allowance and thresholds.
He added: “The drop in National Insurance 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. 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.”
Andy Mielczarek, founder and CEO of SmartSave, expressed a similar sentiment: “Cutting National Insurance will be celebrated, but we cannot escape the limited effect it will have. Someone on a salary of £30,000 will only get an extra £348 in their pocket annually thanks to the change, which will do little to reverse the impact of rampaging energy bills, food prices and living costs over the past two years.
“We should not be overly critical; the Chancellor does not have a bottomless pot of funds to allow for huge sweeping tax cuts. Instead, though, it would have been good to see a greater focus on policies and reforms that could empower people to effectively save, invest, and achieve their financial goals.”
Rachael Griffin, tax and financial planning expert at Quilter, added: “While a cut in taxes will for some be a needed boost, it hardly turns the dial much considering we are dealing with a historic tax burden at present. However, it will certainly be a crowd pleaser with someone earning £30,000 a year being around £58 better off a month if you also take into account the national insurance cuts in the Autumn Statement. However, many people don’t understand how national insurance works and a cut to income tax would have been easier for all to understand but crucially much more expensive.”
Retirement specialist Aegon said the Chancellor’s announcement also calls into question the approach to funding the state pension, which is funded by the national insurance contribution of today’s workers.
Steven Cameron, pensions director at Aegon, said: “While employer National Insurance contributions remain unchanged, having cut employee National Insurance from 12% to 8% and self-employed National Insurance from 10% to 6%, there is now far less money from National Insurance to pay state pensions. The Treasury needs to confirm how they intend to plug the gap and if this will rely on a transfer from broader tax receipts.”
However, Cameron said cutting National Insurance rather than income tax has a hidden benefit for pension savers as it leaves valuable pensions tax breaks intact. In contrast, a cut to income tax would have reduced the pensions tax relief top-up from the Government, which is based on an individual’s higher income tax rate.
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