For employees, the national insurance tax cut announced in the Autumn Statement took effect last month.
For many years, successive governments have been happy for the public to vaguely believe that national insurance contributions (NICs) are building up in some national benefit fund, rather than representing just another tax on income, While something called the National Insurance Fund does exist, as a House of Commons Library briefing noted back in 2019, “The Fund operates on a ‘pay as you’ basis; broadly speaking this year’s contributions pay for this year’s benefits”.
For politicians, the perceived difference between NICs and income tax made it possible to grab the headlines by reducing the basic rate of tax while receiving much less attention for maintaining or even increasing revenue by raising NICs. Last November, the Chancellor appeared to have finally given up on the distinction-without-a-difference approach by proclaiming that his cuts to NICs for employees and the self-employed were tax cuts.
If you are an employee (but not a director, to whom special rules apply), the cut means your main NIC rate (on annual earnings between £12,750 and £50,270) fell from 12% to 10% from 6th January 2024. The extra amount in your pay packet is broadly the same as if a 2p cut had been made to basic rate tax (which covers the same £37,700 band of income). However, from the Chancellor’s viewpoint, the NICs cut was cheaper, as there was no ‘tax cut’ on pension or investment income, both of which are NIC-free.
| Personal Contribution | Salary Sacrifice employer contribution (sacrificed amount + NIC saving) | |||
| Employee NIC rate | 12% | 10% | 12% | 10% |
| £ | £ | £ | £ | |
| Gross Salary | 1,000 | 1,000 | Nil | Nil |
| Employer pension contribution | Nil | Nil | 1,138 | 1,138 |
| Employer NIC | 138 | 138 | Nil | Nil |
| Total employer outlay | 1,138 | 1,138 | 1,138 | 1,138 |
| Employee salary | 1,000 | 1,000 | Nil | Nil |
| Less: income tax | (200) | (200) | ||
| Employee NICs | (120) | (100) | ||
| Net pay = net pension contribution | 680 | 700 | ||
| Tax relief | 170 | 175 | ||
| Total pension contribution | 850 | 875 | 1,138 | 1,138 |
| Gain | 33.9% | 30.1%
|
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The employer’s NIC rate did not change, remaining at 13.8% on all earnings above £9,100. If your earnings are below £50,270, the theoretical advantage of using salary sacrifice to pay pension contributions has been marginally reduced but remains attractive, as shown in the table above, based on a £1,000 sacrifice, If you are among the growing band of higher or additional rate taxpayers, the financial advantage of salary sacrifice is unaltered. Either way, if you are not using salary sacrifice to pay pension contributions, it is still worth taking advice about the option. It is beneficial in most circumstances, but there are drawbacks to be aware of.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
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