How the Chancellor’s National Insurance cuts could help boost your pension contributions this year

In his 2023 Autumn Statement, Chancellor Jeremy Hunt announced a cut to the rate of National Insurance (NI) that some earners will pay.

During the Statement, Hunt said this will help 29 million people, both self-employed and employed, to take home more of their pay each month from 6 January 2024.

Now that these measures have come into force, you may have noticed an uplift in your take-home pay if you are employed. If you’re self-employed, you could find you pay less towards your self-assessed tax bill from now on.

For many earners, the recent NI cut is an ideal opportunity to route more funds into their pensions.

Read on to learn all about the January 2024 NI reduction, how much more you could take home each month, and why sending the additional funds into your pension could be a positive move.

The Chancellor cut the rate of National Insurance for both employed and self-employed earners

Let’s take a look in detail at which types of National Insurance contributions (NICs) Jeremy Hunt cut in his Autumn Statement, and by how much.

Class 1 National Insurance contributions were cut from 12% to 10%

Class 1 NICs are paid by employed taxpayers. Before 6 January 2024, the main rate of NI was set at 12%, but now it sits at 10%.

The government says this reduces NI by an overall 15%, saving £450 a year for the average employee earning £35,400. It says the average nurse will save £520, and teachers may save around £620 annually.

Class 4 National Insurance contributions will be cut by 1p from April 2024

Class 4 NICs, which are paid by self-employed workers who earn more than the Personal Allowance of £12,570 a year, are also set to be cut by 1p from 6 April. Self-employed people will then pay Class 4 NICs at a rate of 8% instead of 9%.

Class 2 National Insurance contributions are set to be abolished altogether in the new tax year

When the 2024/25 tax year begins on 6 April, self-employed earners will also benefit from a total reduction in Class 2 NICs. These are set at a fixed rate of £3.45 a week in the 2023/24 tax year for those earning above the Personal Allowance.

Combined with the drop in Class 4 NICs, the Chancellor said that the average self-employed worker making £28,200 will be £350 better off in the 2024/25 tax year.

2 potential positives of routing your National Insurance savings into your pension pot

If you are one of the earners saving hundreds of pounds a year now that NICs have been cut, you may be wondering how to make the most of your increase in take-home pay.

You may choose to simply use this extra cash as a cost of living buffer, or even pass the uplift on to your adult children who may be earning less than you.

Yet one particularly tax-efficient use of this money could be to route it directly into your pension.

Once you know how much more you will take home each month, you could either increase the amount you pay into your workplace pension or place the funds in a personal pot, like a Self-Invested Personal Pension (SIPP) or similar.

Here are two potential benefits of choosing this route for your additional earnings.

1. You may receive tax relief on your increased contributions

It is important to remember that pension contributions made within the Annual Allowance, which stands at £60,000 for most earners as of 2023/24, may receive tax relief from the government. Your Annual Allowance may be lower if your income exceeds certain thresholds, you have already flexibly accessed your pension, or your pensionable earnings are less than £60,000.

At the time of writing, tax relief is normally paid on pension contributions as follows:

• All taxpayers automatically receive tax relief at the basic rate of 20%, meaning that a £100 pension contribution may actually be worth £125.
• Higher- and additional-rate taxpayers may be able to claim an additional 20% or 25% tax relief through self-assessment, bringing their total relief to 40% or 45% respectively.

So, as long as your increased pension contributions remain within the Annual Allowance, you may gain tax relief on them, allowing you to extract even more value from the Chancellor’s NI cut.

2. You could boost your future retirement savings substantially

Research published by the Guardian exemplifies just how effective routing your extra income into your pension could be later on, particularly for young earners.

The study found that by age 67:

• A 25-year-old basic-rate taxpayer could end up with £134,300 in their pot
• A 25-year-old higher-rate taxpayer could grow their pot by £179,600
• A 55-year-old higher-rate taxpayer may have £20,800 more in their pension.

As you can see, funnelling this extra take-home pay directly into your pension could benefit earners at any age. Of course, the rate of NI is subject to change over the years, but there is no harm in choosing to boost your pension contributions for as long as you can.

A financial planner can help you make informed choices about your wealth

Whether you wish to increase your pension contributions, use your additional earnings to help the next generation, or even invest the money, we are here to help you make informed decisions.

Our experienced financial planners can help you to review your wider wealth circumstances and work towards your long-term goals.

Email enquiries@prosserknowles.co.uk or request a callback from one of our advisers.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) 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.