The Chancellor’s two pence cut to National Insurance contributions came into effect for UK workers on 6 January, but while offering some relief to the current cost of living challenge, there are concerns around the value of the move and in particular what it means for State Pension funding.
The cut will see the main rate of primary Class 1 NI contributions fall from 12% to 10%.
NI contributions are mandatory for those aged 16 or over who are either an employee earning more than £242 a week from one job or self-employed and making a profit of over £12,570 a year.
The Chancellor’s reduction will see the average UK worker on a salary of £34,963 save £447.86 over the course of a year, or £8.61 per week.
For employees earning £40,000, they will save £548.60 a year, while those earning £50,000 will save £748.60. The savings rise to £754 for those on an income of £100,000.
However, analysis from Quilter has revealed that despite the NI cut, UK workers are just £2.68 a week better off than they would have been had tax thresholds not been frozen.
Rachael Griffin, tax and financial planning expert at Quilter, said: “The Chancellor’s 2p cut to National Insurance was the big ‘rabbit out of the hat’ moment at the Autumn Statement, providing UK workers with some long-awaited respite via a boost to their monthly take home pay from this month. However, while a £447.86 yearly top up for the average worker will be welcomed, it will hardly be life changing.”
Griffin said that thawing the frozen income tax thresholds would make a considerable difference and said the Spring Budget will likely be the Chancellor’s final opportunity to make any “vote-swaying announcements” ahead of an election.
Griffin continued: “Income tax thresholds are currently frozen until 2028 so a reduction alongside the cut to NI could bring some much-needed relief to UK workers who have borne the brunt of the cost-of-living strain. The government’s adoption of a stealthy fiscal drag approach has resulted in a huge number of UK workers being pushed into higher income tax bands as wages have risen rapidly in an attempt to keep up with inflation.”
Recent figures from the Office for Budget Responsibility show there will be an estimated 7.5 million higher rate taxpayers by 2028/29 if thresholds remain frozen, almost double the 3.8 million recorded in 2019/20.
Aegon’s pension director Steven Cameron flagged the potential implications for individual finances and the future funding of the state pension and current triple lock.
He said: “While positioned as a ‘tax’ cut, National Insurance operates differently from income tax. First, individuals above state pension age (currently 66) are already exempt from paying NI. So they won’t see any difference to their finances. Second, unlike income tax rates which are set by devolved Governments, the NI change will benefit those across the UK including those in Scotland, many of whom face an income tax hike come April. Third, the NI cut doesn’t affect the generosity of pensions tax relief. Had income tax been cut instead of NI, pensions tax relief would have been reduced accordingly.
“But however welcome the NI cut is short term, it does raise concern over how state pensions are funded. Today’s state pensions are paid for from the NI of today’s workers. The cut will mean less NI receipts even though the state pension is increasing by 8.5% in April, more than double the current rate of inflation.
“Our ageing population, combined with the current triple lock mechanism, means the costs of state pensions are rising sharply. Reducing NI contributions, their primary source of funding, adds to the challenge, potentially requiring alternative state pension funding sources from general taxation in future.”
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