Chancellor Jeremy Hunt has cut national insurance contributions for employed and self-employed people by 2p in the pound in his Budget today (March 6).
The tax cut from 10 per cent to 8 per cent for employed people, which will come into effect next month, will save someone earning a £30,000 salary £349 a year, rising to £749 for those earning £50,000.
The chancellor has also cut NI for the self-employed, with rates falling from 8 per cent to 6 per cent. It comes in addition to the cuts already announced in his last autumn statement.
Hunt told the House of Commons: “Because we have asked those with the broadest shoulders to pay a bit more, today I go further. From April 6 employee national insurance will be cut by another 2p from 10 per cent to 8 per cent.
“And self-employed national insurance will be cut from 8 per cent to 6 per cent. It means an additional £450 a year for the average employee or £350 for a person who is self-employed.
“Combined with our Autumn changes, it means 27mn employees will get an average tax cut of £900 a year and 2mn self-employed will get a tax cut averaging £650.
“[These are] changes that make our system simpler and fairer and changes that grow our economy by rewarding work.”
A 2p cut will cost the government £10bn, which Sarah Coles, head of personal finance at Hargreaves Lansdown, said was “more manageable for a chancellor with shrinking headroom”.
However Coles pointed out cutting NI would benefit fewer people than a cut in income tax would.
She said: “27mn workers would pocket a tax cut, but millions more wouldn’t, because it wouldn’t affect the tax on pensions, and income from savings and investments like property. It means an awful lot of voters would get no benefit from the change.”
National insurance was cut in January 2024 by 2p and, according to analysis, has saved an individual earning an average salary of £34,963, £447.86 a year.
Myron Jobson, senior personal finance analyst at Interactive Investor, said while the tax saving will be “significant” it will ultimately be eroded over time due to frozen tax thresholds and allowances.
“The deep freeze of tax thresholds and allowances which, in tandem with wage inflation, means we’ll be paying more in tax in the years to come.
“It is a sneaky tax grab, as people might not realise they are paying more in taxes simply due to inflation, making it seem less transparent compared to explicit tax increases,” he added.
In the run up to the Budget, Hunt had hinted tax cuts would be on the cards with many questioning whether it would be income tax or NI on the chopping block.
Rumours of a 1 per cent cut to income tax circulated which Steven Cameron, pensions director at Aegon, said at the time would not be good for future pension savings.
He said: “Your pension contributions are boosted by tax relief at your highest rate of income tax, so a cut to income tax rates means less pension tax relief.”
Last month (February 27) the Institute for Fiscal Studies warned Hunt should not make any tax cuts in the Budget until he has set out how the government would pay for them.
Martin Mikloš, research economist at the IFS, suggested at the time Hunt may try to bank on the higher revenues that have come as a result of population growth to fund tax cuts.
The IFS said without Hunt providing a detailed spending plan as part of a spending review, he should refrain from announcing any further cuts.
alina.khan@ft.com
