The Chancellor announced that he was cutting National Insurance in his budget of March 6th.
National Insurance does not sound exciting, and partly because of the name, many of those who pay it – which is practically everybody – may have missed the significance of his announcement.
It is actually a very worthwhile tax cut.
If you are working, you will start paying less tax because of the cut in National insurance (or NI) contributions in the new tax year. What’s more, there is a way to make the cut even more worthwhile – by using it to potentially add tens of thousands to your pension pot.
At Continuum we are looking at NI contributions – and why paying less could potentially help make you much better off.
What exactly is National Insurance?
National Insurance payments were introduced in 1911, to fund a safety-net for workers who fell on hard times.
Anyone needing cash for medical treatment, or because they had lost their job, could claim from the fund.
Today, National Insurance is simply a tax on earnings and self-employed profits that runs parallel to the income tax system. Your National Insurance contributions (NICs) pay for state benefits including the state pension, statutory sick pay or maternity leave.
Paying National Insurance is of course compulsory, like any other tax – but having a payment record allows you to qualify for benefits that include the State Pension.
Who pays National Insurance?
National Insurance has to be paid by both employed and self-employed workers from 16 until they reach state pension age (currently 66), although you will be exempt if you earn below £12,570, are unemployed, or receiving benefits.
If you don’t meet the mandatory criteria, you can still pay voluntary contributions to protect your National Insurance record.
How much you pay starts to become complicated.
There are different types of National Insurance known as ‘classes’.
- Class 1: Payable by employees and employers. Employee’s National Insurance is deducted from their pay, while employer’s National Insurance is paid by the employer.
- Class 2: Flat rate payable by the self-employed. Most people pay Class 2 through Self Assessment.
- Class 3: Voluntary contributions. Paid by those who want to complete their National Insurance record for benefit purposes.
- Class 4: Payable on profits above a set level by the self-employed.
The actual level of contributions for each class can be found here. But the good news is that your NI contributions have probably fallen.
If you’re an employee, you used to pay 12% on earnings between £12,570 and £50,270 in Class 1 National Insurance contributions. This was reduced to 10% in January of this year, and the Chancellor cut again to 8% from this April. Each 2p cut is worth around £450 for the average worker. This means the two measures combined will save £900 a year for the typical worker on an annual salary of £35,000.
If you’re employed, National Insurance is automatically deducted from your monthly pay.
From April, employees pay 8% Class 1 National Insurance on earnings over £12,570, and 2% on earnings over £50,270. The exact amount you will actually save depends on how much you currently earn – as this affects how much National Insurance you pay to begin with. High income households will benefit most.
Making the extra money work for you
You probably have plenty of ways to spend an extra £1000 or so this year. But if put it into your workplace pension, before you even get the chance to miss it, you may substantially increase your retirement savings – because you would be boosting your pension pot by more than £1000.
This is because of the tax relief pension contributions enjoy. Contributing to a private pension attracts tax relief at your highest marginal rate. Basic rate taxpayers get 20% tax relief, higher rate taxpayers can claim 40% and additional rate taxpayers get 45%. This means putting £1000 saved from National Insurance contributions into a pension becomes £1200 for a basic-rate taxpayer and £1400 if you are in the higher rate tax band.
And that is of course before the wonders of investment and compound interest can work to grow your wealth even more.
Ready to make your NI cut work for you?
If you have any questions about National Insurance or want to make the good news about the rate cut into even better news for your future, simply call us at Continuum.
We can show you the way to potentially boost your pension prospects – and start looking forward to a more prosperous retirement.
BBC – History – British History in depth: The Welfare State – Never Ending Reform
How will national insurance changes affect me? – Times Money Mentor (thetimes.co.uk)
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment, the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken.
Pension savings are at risk of being eroded by inflation.
The Financial Conduct Authority does not regulate taxation advice.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
