The impact of further reductions in UK National Insurance announced in the 2024 Spring Budget

published on 15 April 2024 | reading time approx. 5 minutes

The Spring Budget 2024, announced by Chancellor Hunt on 6 March 2024, was the second consecutive fiscal event in which changes were made to National Insurance Contributions, or NICs. These reforms impact employed and self-employed taxpayers throughout the UK. Headlines include the reduction in the main NIC rate to 8 percent as of 6 April 2024, lowered from a previous main rate of 10 percent. The Chancellor has stated that this cut will benefit roughly 27 million employed workers – not including reductions in tax liabilities for self-employed professionals.

Details of the National Insurance Reforms from April 2024 »
Understanding changes to Class 2 National Insurance Rates for self-employed taxpayers »
Complications with changes to Class 2 National Insurance Contributions »
Speculation around the proposed removal of Class 2 National Insurance Rates »
Impacts of National Insurance Rate cuts on average incomes »
Changes to high-income child benefit charge »

Details of the National Insurance Reforms from April 2024

NICs are used to collect revenues based on the annual earnings of all taxpayers who fall above the minimum threshold and are aged between 16 and the State Pension age. They also affect eligibility for some benefits, including the UK State Pension.

Revenues are deposited into the British National Insurance Fund, from which the government pays benefits – but this source of revenue is not ring fenced and can be topped up and used to finance expenditure in other areas.

Changes to NICs are being introduced in a series of reforms. The previous budget announced a drop in the main rate, applied to Class 1 NICs, from 12 percent to 10 percent which took effect as of 6 January 2024. The further reduction to 8 percent will apply from 6 April onward, coinciding with the start of the new 2024/25 tax year.

Self-employed workers will also see a reduction in the main rate applied to Class 4 NICs, falling from 9 percent to 6 percent. Most self-employed taxpayers will no longer be obligated to remit Class 2 NICs, calculated against their annual income declared through the self-assessment process.

Understanding changes to Class 2 National Insurance Rates for self-employed taxpayers

Currently, Class 2 NICs are calculated on a weekly flat rate. Most self-employed taxpayers who are over 16 and below the State Pension age are liable, paying these NICs alongside their income tax obligations based on their annual self-assessment tax return.

Self-employed professionals, freelance consultants, and sole trader business owners make Class 2 NIC contributions to maintain eligibility for the State Pension, as well as other entitlements such as the Employment and Support Allowance and Maternity Allowance.

During the 2023/24 tax year, the Class 2 NIC rate is 3.45 pounds per week, payable by self-employed taxpayers with annual taxable profits over the lower profits limit of 12,570 pounds. Therefore, the annual charge is equivalent to 179.40 pounds, based on the above rate applied to 52 weeks of the year.

Taxpayers who are self-employed but earn beneath the lower profits limit, but above the small profits threshold of 6,725 pounds do not pay Class 2 NICs. Instead they are granted a National Insurance Credit which acts as a confirmation of their entitlement to state benefits on the same basis as any other taxpayer who has remitted Class 2 NICs.

In this tax year, other self-employed taxpayers with a taxable profit of less than 6,725 pounds do not have Class 2 NIC liabilities but are not able to request a National Insurance Credit. Should they wish to preserve future entitlement to benefits, they can opt to make voluntary Class 2 contributions at the same 3.45 pounds per week rate.

Complications with changes to Class 2 National Insurance Contributions

Although the reforms appear relatively straightforward, the statement made during the 2023 Autumn Statement indicating that “no one” would be expected to pay Class 2 NICs as a self-employed taxpayer has not been borne out.

Instead, the reforms introduced from 6 April onward will primarily affect self-employed professionals who earn an annual taxable profit of 12,570 pounds and above. They will not be expected to pay Class 2 NICs but will see no reduction in their entitlement to the contributory state benefits as described – meaning their position is similar to other taxpayers with lower earnings who receive a National Insurance Credit.

Taxpayers earning above the small profit threshold and the lower profits limit – or between 6,725 pounds and 12,570 pounds – will continue to be able to apply for a National Insurance Credit after 6 April but will equally not need to make any Class 2 NIC payments.

Conversely, lower income earners will not see any changes and will continue to be required to pay Class 2 NICs on a voluntary basis to be able to make the minimum contributions necessary to qualify for the State Pension – meaning that Class 2 NICs have not, in fact, been removed altogether.

Speculation around the proposed removal of Class 2 National Insurance Rates

The Chancellor has previously indicated that Class 2 NICs would be removed, and although they remain part of the tax landscape for self-employed lower income earners, the rate will be fixed at the current 3.45 pounds per week rate for the 2024/25 tax period. The small profits threshold is also static at 6,725 pounds.

There is an anticipation that additional reforms will be announced later in the year, in line with the government’s stated intention to abolish NICs in their entirety, as reiterated in the Spring Budget. However, the consultation referred to has not been confirmed, nor have any dates been announced. Of course, the upcoming general election may further influence those plans.

Chancellor Hunt has suggested that the Conservative Party expects to remove NICs completely while acknowledging that this is a long-term ambition and a reform unlikely to happen within the next parliament.

Impacts of National Insurance Rate cuts on average incomes

The government has stated that the reduction in NICs, combined with the changes made in the previous Autumn Statement, means that:

Tax burdens overall have been reduced by 20 billion pounds per year.
Employees earning the average wage of 35,400 pounds during 2024/25 will pay a third less in NICs, saving 900 pounds.
The average self-employed taxpayer earning taxable profits of 28,000 pounds will see a reduction in their tax obligations of 650 pounds a year.

Forecasts released by the Office for Budget Responsibility show that the NIC reduction from April will prompt growth in the number of national working hours, resulting in the addition of 100,000 full-time roles to the British workplace by the 2028/29 period.

Further, the OBR anticipates that more than 15,000 people in full-time roles, and 30,000 individuals in total will return to the workforce or begin work in the same period, resulting in an additional increase to the number of hours worked equivalent to 80,000 full-time roles.

Changes to high-income child benefit charge

Many families with children who earn a higher income continue to claim Child Benefits in order to protect their National Insurance position and long-term entitlement to benefits such as the State Pension. Other considerations include the need to ensure a child is issued with a National Insurance number before the age of 16.

The High Income Child Benefit Charge (HICBC) means that these higher earners pay an additional tax charge intended to claw back the Child Benefit received. In conjunction with changes to NIC rates, rather than thresholds, the government announced an increase to the point at which the HICBC will apply.

From April 2024, partners where one or both individuals earn 60,000 pounds or more per year will be obligated to pay the HICBC, an uplift from the previous 50,000 pounds threshold.

HICBC will also be charged on a basis of 1 percent for each 200 pounds of benefit received. Previously, the tax was calculated as 1 percent of the Child Benefit for each 100 pounds earned in excess of the threshold. In effect, that means Child Benefits will be available, at least partially, for taxpayers with incomes up to 80,000 pounds.