National Insurance Contribution changes in 2024: What you need to know
The National Insurance system is essential for funding the UK’s public services, such as the NHS, unemployment benefits, and state pensions. This year, the government has introduced significant National Insurance Contribution (NIC) changes impacting employees and self-employed individuals. This blog will provide a comprehensive overview of these changes, explaining what they mean for your finances and what actions you should have taken.
Overview of National Insurance Contribution changes
These changes aim to reduce the tax burden for working people and streamline the tax system. The fundamental changes are mentioned below.
During the 2023 Autumn Statement, the government announced:
- Starting January 6, 2024, Class 1 employee NICs decreased from 12% to 10%.
- Effective April 6, 2024, Class 2 NICs for the self-employed apply when someone’s annual profit exceeds a set threshold (the ‘lower profits threshold’), which is currently £12,570, will be eliminated.
- Effective April 6, 2024, Class 4 NICs for the self-employed will drop from 9% to 8%.
In the 2024 Spring Budget, the government further stated:
- From April 6, 2024, Class 1 NICs for employees will be further reduced from 10% to 8% on earnings of between £12,570 and £50,270
- Class 4 NICs for self-employed individuals will also be lowered from 8% to 6%.
What is National Insurance?
National Insurance (NI) is a tax on earnings and self-employed profits, paid alongside income tax, that funds the UK’s social security system. NICs are typically deducted from employees’ salaries, and self-employed individuals make direct payments, normally through their annual self-assessment.
National Insurance is calculated just like income tax. It is determined based on an individual’s employment status. It is calculated on gross earnings or profits—earnings minus allowable expenses—exceeding a specified threshold before any deductions for tax or pension contributions.
Every worker aged 16 and above, up to retirement age, has to contribute to National Insurance as long as their earnings exceed a specific threshold that varies based on their employment status:
- More than £1,048 a month (£12,570 a year) as an employee.
- More than £6,725 a year in profit when self-employed.
Different classes of National Insurance contributions
Here’s a breakdown of the different classes of National Insurance contributions:
1. Class 1 National Insurance contributions (for employees and employers)
Both employers and employees need to pay Class 1 National Insurance contributions based on their earnings up to a specific threshold limit known as the upper earnings. The current upper earnings limit is £50,270 per year.
2. Class 2 National Insurance contributions (self-employed)
Self-employed individuals paid Class 2 National Insurance contributions if their profits exceeded a designated threshold known as the small profits threshold. However, it’s important to note that Class 2 contributions were eliminated in April 2024.
3. Class 3 National Insurance contributions (voluntary contributions)
Class 3 contributions are designed for individuals who wish to make voluntary payments to fill any gaps in their National Insurance record. This is particularly beneficial for those who want to ensure they qualify for specific benefits, including the state pension, even if they aren’t required to pay.
4. Class 4 National Insurance contributions (self-employed)
Class 4 National Insurance contributions apply to self-employed individuals whose profits surpass another specified limit, referred to as the profits threshold. For the 2024-25 financial year, they are:
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
- Class 4 NI is not paid if profits are below £12,570.
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How National Insurance works for employees, employers, and the self-employed
Understanding National Insurance (NI) contributions can be challenging, especially with the recent changes implemented in April 2024. Let’s explain how it works for employers, employees, and the self-employed and what these changes mean for each group.
1. National Insurance for employees
Contributions:
Employees mainly contribute to National Insurance through Class 1 deductions taken from their salaries before they are paid, using the PAYE system. These contributions are essential for funding state pensions, unemployment benefits, and social security initiatives.
Changes in 2024:
- Between the Primary Threshold and the Upper Earnings Limit: 8%
- Above the Upper Earnings Limit: 2%
Primary Threshold and Upper Earnings Limit
- The Primary Threshold for 2024/25 is £1,048 per month. This means you don’t pay any National Insurance on earnings below this amount.
- The Upper Earnings Limit is £4,189 per month. You’ll only pay the higher rate of 2% on any earnings above this amount.
What should employees do now?
Employees do not have to do anything, as their employers will have adjusted National Insurance deductions automatically based on the new rate. However, it’s recommended that they check their payslips for accurate take-home pay changes.
2. National Insurance for employers
Employers deduct Class 1 National Insurance contributions from employee salaries via PAYE and also contribute their own Class 1 National Insurance based on employee salaries.
Contributions:
Employers contribute to the National Insurance contribution alongside their employees. Here’s a breakdown of the relevant National Insurance changes for employers:
- Class 1: Paid on earnings above a certain threshold (NIC thresholds), similar to employee Class 1 contributions. However, the employer rate remains unchanged for the 2024-2025 tax year.
- Class 1A: Employers may also need to pay Class 1A National Insurance on certain employee benefits and expenses, such as company cars and private health insurance. The Class 1A rate is currently 13.8% for 2024-2025. This rate aligns with the secondary Class 1 rate.
- Class 1B: Employers can use PAYE Settlement Agreements (PSAs) to pay Class 1A National Insurance on small or irregular taxable expenses or benefits for employees. The Class 1B rate is also 13.8% for 2024-2025.
Changes in 2024:
While there were no direct changes to employer National Insurance rates in 2024, the reduction in employee contributions might indirectly impact their payroll costs and budgeting.
What should employers do now?
Although employer National Insurance rates remain unchanged, employers should still review their payroll systems to ensure they are calculating and deducting the correct amounts for both employee and employer contributions.
Employers offering taxable benefits to employees should be aware that the Class 1A rate remains at 13.8%.
3. National Insurance for self-employed individuals
Contributions:
Self-employed individuals previously made contributions through two distinct classes:
- Class 2 National Insurance: This contribution was once compulsory for self-employed individuals whose earnings exceeded the small profits threshold. However, it was eliminated in April 2024.
- Class 4 National Insurance: This applies to profits exceeding the current threshold of £12,570 annually. Self-employed individuals are required to pay a percentage of their earnings that go beyond this limit as a National Insurance contribution.
Changes in 2024:
A significant update for the self-employed is the removal of Class 2 National Insurance contributions. Furthermore, the Class 4 National Insurance rate was lowered initially to 8% and then to 6% from April 2024 for profits ranging from £12,570 to £50,270 per year.
What should employers do now?
With the discontinuation of Class 2 contributions, those who previously contributed may need to revise their budgeting or tax strategies. For Class 4 contributions, the reduced rate will be automatically applied when completing Self Assessment tax returns. It’s essential to remain informed about any additional changes or threshold adjustments.
Learn more about National Insurance contribution changes
The National Insurance changes in 2024 aim to ease financial burdens for taxpayers. But, it is crucial to understand how these changes impact you, whether you’re an employee, employer, or self-employed. Reviewing your payslips, tax records, and NI documents is essential. Additionally, seeking guidance from a financial advisor or tax expert can be advantageous to ensure that you are fully capitalising on the benefits of these changes while adhering to all relevant tax and National Insurance regulations.
