Spring Budget 2024: National Insurance on a countdown to zero?

From 6 April 2024, the main class 1 employee national insurance contribution (NIC) rate will drop from 10% to 8%, the second cut in six months and effectively a one-third reduction overall. There is no reduction in employer NICs.

The main rate of class 4 self-employed NICs will similarly reduce from 8% to 6% (on top of the previously announced reduction from 9% to 8% and thus also a one-third reduction overall).

Are NICs on a countdown to zero after the Spring Budget 2024?

• Download our full summary (PDF)
• Download our tax tables (PDF)

The Chancellor signalled a longer-term aim to abolish what he termed "unfair" NICs altogether. But that would leave a massive £40bn-£50bn black hole in Treasury finances if there was no consequent increase in taxes somewhere else.

Add to that the fact that previous research projects into aligning NICs with Income Tax to simplify the system revealed a number of technical challenges in doing so.

What was not mentioned in the Budget was the effect of fiscal drag, that is the effect of not increasing tax and NIC thresholds by the rate of inflation, so more income is in fact taxed than would otherwise be the case, even with the NIC cuts.

Current cuts: Spring Budget 2024 announcements

Thresholds

• The NICs upper earnings limit, upper secondary thresholds and upper profits limit will remain aligned to the unchanged higher rate threshold at £50,270 for 2024/25 to 2027/28, as previously announced.
• The class 1 primary threshold (PT) of £12,570 and secondary threshold of £9,100 will remain frozen until April 2028. 
• Similarly, the upper earnings limit (UEL) and class 4 upper profits limit (UPL) will remain aligned to the higher rate threshold at £50,270 through to April 2028. The lower earnings limit (£6,396) and the small profits threshold (SPT – £6,725) will also be unchanged in 2024/25.

Rates

• The class 1 primary (employee) contribution rate on earnings between the PT and UEL will be cut by 2% from 8% from 6 April 2024. The 2% rate will be unchanged on earnings above the UEL.
• The class 4 (self-employed) contribution rate on earnings between the lower profits limit (LPL) and UPL will be also reduced by 2% to 6%. The 2% rate will not change on earnings above the UPL.
• Class 2 contributions will no longer be required from the self-employed, as announced in the Autumn Statement 2023. However, those with profits below the SPT who wish to retain access to contributory benefits (e.g. state pension) have the option to make voluntary contributions at a rate of £3.45 a week. 
• The voluntary class 3 rate will be unchanged at £17.45 a week for 2024/25.

Key NIC Rates from 6 April 2024

Further information

• Rates and thresholds for employers 2024/25
• NIC Reduction in Rates (No 2) Bill 2024
• Spring Budget 2024 rates and allowances

Employee NICs

• Directors/employees may wish to defer their bonuses (where appropriate) in order to have it paid after 6 April 2024 and save NICs. (NOTE: There are special rules for directors)

• Employers can add a message to April payslips to ensure employees are aware of why they will have seen a reduction in the amount of NICs on their payslip.

Merging income tax and NICs?

Previous research into merging the two taxes has concluded that such a move would be complex, but ultimately it would simplify the tax system for individuals and businesses.

Questions such as how state pensions would in future be calculated would need to be addressed, as they are currently based on NIC records, so legislation would have to be carefully framed to avoid people losing out.

For the self-employed, Class 2 NICs provide entitlement towards ‘contributory’ state benefits such as the State Pension. (More on Class 2 below).

Appearing before the Spring Budget 2024 Treasury Committee hearing on 13 March 2024, Jeremy Hunt explained that he was not setting a date for the abolition of NICs or their merger with Income Tax. He said it was a "long-term ambition" over many parliaments and it would only happen when it was affordable to do so, and would not be done through extra government borrowing.

Hunt added that a number of factors would determine how quickly the policy could be implemented, including particularly the rate of growth of the economy.

Asked if rates of Income Tax would have to be increased to compensate for lost revenue from abolishing NICs, Hunt avoided answering the question and reiterated that he wanted to continue to reduce national insurance when possible, as he had done with the 2023 Autumn Statement and now the Spring Budget.

It is therefore quite feasible that a further cut in the rate of NICs may be announced before this autumn's general election (assuming it is in the autumn).

Class 2 NICs for the self-employed

Class 2 NICs for the self-employed will be scrapped from April 2024.

This mainly affects those with profits above the Lower Profits Limit (£12,570). And even though they will no longer have to pay Class 2 NICs, they will still benefit from entitlement to contributory state benefits such as the State Pension.

Those with profits between the £6,725 Small Profits Threshold and the £12,570 Lower Profits Limit will continue to benefit from a National Insurance Credit without having to pay Class 2 NICs.

Where profits are below £6,725, individuals can continue to pay voluntary Class 2 NICs in order to build their entitlement to the State pension and other contributory benefits. So, Class 2 has effectively not been scrapped for those in this position.

Further information

For more information, check out our Employer Solutions Hub.

[Gary Mackley-Smith]