Jeremy Hunt’s decision to cut national insurance contributions for 27 million British workers by two percentage points comes into effect this Saturday.
In his spring budget, the Chancellor of the Exchequer announced that he would cut employees’ national insurance contributions from 10% to 8% and the self-employed’s national insurance contributions from 8% to 6%.
“This means an extra £450 a year for the average worker and £350 for the self-employed. Combined with the tax cuts agreed in the autumn, this means that 27 million workers will receive an average tax relief of £900 a year and 2 million self-employed people will receive an average tax relief of £650,” the Chancellor said in his budget speech.
“Changes that make our system simpler and fairer. And changes that grow our economy by rewarding work,” he added.
Hunt said the Office for Budget Responsibility (OBR) expected the move to create 200,000 extra jobs, adding that the move would reduce income taxes to their lowest level since 1975.
“This is the second fiscal event in which we have cut social security contributions for employees and the self-employed,” Hunt said.
“We have reduced the amount by a third in six months without increasing borrowing and without cutting spending on public services.”
“This means that the average earner in the UK now has the lowest effective personal tax rate since 1975 – one that is lower than in America, France, Germany or any other G7 country,” he added.
Read more: Social security cuts come into force with ‘average savings’ of £900 a year
Employees and self-employed people currently pay 10% on earnings between £12,570 and £50,270 in Class 1 national insurance contributions.
This amount was reduced from 12% of income in the autumn settlement, but the threshold at which payments must be made (£12,570) is frozen until 2028.
Analysis by investment platform AJ Bell has found that a two percentage point cut in the national insurance rate, from 10% to 8%, would be worth almost £250 to someone earning £25,000 a year, with the maximum saving being £754.
How much you would save by reducing social security contributions
Laura Suter, finance director at AJ Bell, said: “Hunt has chosen a less popular but cheaper method of cutting taxes: cutting national insurance contributions by two percentage points. This is the second cut in national insurance contributions for employees this year. Taken together, the changes will save almost £900 in national insurance contributions for workers earning £35,000 a year.”
“The starting rate of national insurance for employees, which applies to the income band between £12,570 and £50,270, has been reduced from the current 10% to 8%. Taken alone, this move saves the average earner around £450 a year and those earning £50,270 or more a total of £754 a year.
“But low earners will not be celebrating this move. Someone earning £15,000 a year will save less than £50 a year on their national insurance bill as a result of today’s cut – and if you add today’s cut to the cut agreed in the autumn, they will save less than £100 a year.”
Retirees would not be affected by a cut in Social Security, nor would those who receive income from savings and investments such as real estate. A cut in Social Security is also cheaper than a cut in income tax because it only applies to earned income.
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A two percentage point cut in workers’ social security contributions costs the government around £10 billion a year.
The think tank Institute for Public Policy Research has calculated that almost half of the benefits would go to the richest 20 percent of households, while only three percent would end up in the pockets of the poorest fifth of Britons.
If the Chancellor of the Exchequer were to cut social security contributions by 2 pence in the budget, this would cost £10.4 billion in 2024/25.
Londoners would benefit the most (£608 on average), while people in the North East would receive less than £1 a day (£342 on average). pic.twitter.com/SrxFBmPjN6
— IPPR-P (@IPPR) March 5, 2024
Rachael Griffin, tax and financial planning expert at Quilter, said: “While a tax cut will be a necessary boost for some, it is hardly significant given that we are currently facing a historic tax burden. However, it will certainly go down well because someone earning £30,000 a year will have around £58 more a month when you also take into account the cuts to national insurance contributions in the Autumn Statement.”
“However, many people do not understand how social security works, and a reduction in income tax would have been easier for everyone to understand, but above all much more expensive.”
Watch: British budget: Hunt: Social security contributions will be cut to 8%
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