How the New NI Rates Affect Your Take-Home Pay
From 6th January 2024 around 27 million employees pay 10% National Insurance (NI) contributions on income between £12,571 and £50,270. This is down from an NI rate of 12%.
In general terms, the savings are as follows:
| Salary £ |
Income tax £ |
Employee NI £ |
NI saving £ |
|---|---|---|---|
| 25,000 | 2,486.60 | 1,243.00 | 248.60 |
| 35,000 | 4,486.00 | 2,243.00 | 448.60 |
| 50,000 | 7,486.00 | 3,743.00 | 748.00 |
| 60,000 | 11,432.00 | 3,964.60 | 754.00 |
So the average saving is probably around £450 for an employee on a salary £35,000.
The Impact of Reduced NI Rates for Self-Employed Professionals
From 6 April 2024 around 2 Million self employed people pay NI contributions at 8% on profits which is down from 9% across the profit range £12,571 to £50,270.
These NI savings are not particularly beneficial when one compares this with the so called ‘stealth taxes’ which arise through fiscal drag.
Fiscal drag is the effect of inflation over time pushing up the level of wages and profits necessary to pay for the same level of household’s goods and services, but which results in a higher proportion of income tax and national insurance being paid.
Personal allowances (£12,570) and the basic rate band (£37,700) have been fixed at their 2021/22 rates until 2027/28.
For example, if someone earned £35,000 in tax year 2021/22 the tax deducted under PAYE would be £4,486.00. An effective tax rate of 12.8%
During the period 2021/22 to 2027/28 inflation may have reached 30% or more. This would have an impact on the price of goods and services and would cause salaries to rise.
If the £35,000 salary had kept in line with inflation during this period then it would have risen to £45,500. The tax payable on this salary will be £6,586.00. An effective tax rate of 14.47%.
But this is not the end of the story. The fixing of personal allowances and basic rate band also affects the level of national insurance an employee is paying.
If the individual’s salary increases from £35,000 to £45,500 over this period then the NI would increase from £2,243 to £3,293.
The overall effect as a percentage of income can be demonstrated as follows:
| Salary (21/22) £ |
Total Income Tax & NI £ |
Salary* (27/28) £ |
Total Income Tax & NI £ |
||
|---|---|---|---|---|---|
| 25,000 | 3,729.60 | 14.91% | 32,500 | 5,797.00 | 17.83% |
| 35,000 | 6,729.00 | 19.22% | 45,500 | 9,879.00 | 21.71% |
| 50,000 | 11,229.00 | 22.45% | 65,000 | 17,496.60 | 26.91% |
| 60,000 | 15,396.00 | 25.66% | 78,000 | 22,956.60 | 29.43% |
*Enhanced salary due solely as a result of inflation.
In conclusion, fiscal drag can raise billions for the treasury simply because the personal allowance and basic rate band are not inflation linked. However, this is not an uncommon aspect to our tax system, capital gains tax is levied on the increase in value of an asset without any adjustment for inflation, as a result of the abolition of indexation relief from 6th April 2008.
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