Following announcements by the government, there are changes in National Insurance occurring in 2024 for both employees and those who are self-employed.
In this article, we detail the changes, and cover what employers and self-employed people need to do now.
Here’s what we cover:
- An overview of National Insurance changes
- What is National Insurance?
- How National Insurance works for employees and the self-employed
- What’s changing for employees in 2024?
- What should employers do now?
- What’s changing for the self-employed?
- What should self-employed people do now?
- Final thoughts
An overview of National Insurance changes
Simpler National insurance calculations and less to pay for employees and self-employed people sounds great, doesn’t it?
As improvements to the National Insurance regime kick in throughout 2024, businesses have welcomed them cautiously.
But detailed investigation reveals a complex picture of the impact on employers, their staff, and the self-employed.
Twenty nine million working people will get a financial lift from the reduction to 8% National Insurance contributions (NICs) for the self-employed; to 10% for employees; plus the removal of Class 2 payments for most self-employed people.
But there’s a broader context of National Insurance and income tax threshold freezes – which many say are an effective tax hike in an inflationary environment – and historically high overall taxation rates in the UK.
The National Insurance changes affecting employers started on 6 January 2024, and small and medium-sized enterprises (SMEs) have been racing to update their payroll software, handle staff queries, factor changes into financial plans, and update employees.
Those working for themselves have longer to prepare – cuts to their National Insurance rates take effect from April 2024 and will be calculated in their 2024/25 tax returns.
But you will need to be clear on what the changes mean as they are potentially misleading.
Self-employed people should also adjust their financial forecasts to reflect the cuts and ensure they can still access NI contributor’s benefits.
What is National Insurance?
National Insurance is a set of tax contributions employees and the self-employed pay to qualify for certain benefits and the state pension.
Employers also contribute to their workers’ National Insurance payments.
The government uses the contributions to fund public services such as the NHS, unemployment benefits, and the state pension.
In reality, the link to these benefits is vanishing and National Insurance has become more like an additional level of general income tax.
How National Insurance works for employees and the self-employed
How much NI you pay is based on your employment status and earnings.
For employees, the amount depends on their National Insurance category and earnings band.
Employee contributions are called Class 1 NICs and the employer takes these from the employees wages.
The employer also pays NICs based on the employee’s earnings, expenses and benefits, and lump sums such as redundancy payments.
Self-employed people with profits above £12,570 currently pay two types of National Insurance – Class 2 and Class 4. The first is a flat rate of £3.45 a week.
The second is profit-related – currently 9% on profits between £12,570 and £50,270; and 2% on those over £50,270.
Class 3 NICs are voluntary and made by people who want to fill gaps in their contributions record to ensure entitlement to full benefits such as the state pension.
There are different National Insurance rules for limited company directors, share fishermen, and landlords.
What’s changing for employees in 2024?
In the 2023 Autumn Statement, Chancellor Jeremy Hunt announced National Insurance changes that aim to cut tax for working people and simplify the tax system.
On 6 January 2024, the main rate of NICs paid by employees fell from 12% to 10%.
This applies to those who earn more than £12,570 and will save £450 a year for workers on an average salary of £35,400.
The lower earnings limit – at which employees start receiving National Insurance credits – has been frozen at £6,396.
This maintains low-income workers’ access to NICs credits, without having to pay contributions.
What should employers do now?
Check your payroll software
If you haven’t amended your payroll system in time for employees to see the NIC cuts in their January payslip, you need to rectify this in subsequent months and reimburse employees for the full value of the reduction.
A good payroll software provider should be well prepared, especially if you’re using cloud software, reducing pressure on your team.
Check your provider has made all the necessary changes and you have the latest software release.
The changes haven’t been straightforward for many businesses.
Nisha Prakash, a financial management lecturer at University of East London (UEL), says: “Adaptation of payroll systems to accommodate the changes could involve software updates, staff training, and other administrative changes and costs.”
This has been testing for many businesses, with staff off over Christmas and payroll teams now entering their busiest period.
An article by KPMG says the changes are particularly challenging given the short timescale and requirement to reconfigure, test and deliver them in a live payroll environment, mid tax year.
Work with your accountant
Alex White, North West regional managing partner at accountancy firm Xeinadin, says: “Employers have been in a tight corner to update payroll systems in time.
“Changing software systems is rarely an overnight fix, making it costly and time-consuming.
“Also, the reduction could cause a sharp increase in queries if employees need refunds for NICs applied incorrectly.
“To alleviate the administrative burden, companies should communicate clearly with their accountant or payroll provider to understand the pros and cons of the changes.
“This is especially important as the Spring Budget may bring more new challenges to business owners.”
Keep your employees up to date
Keeping employees abreast of the changes is also critical.
The Chartered Institute of Payroll Professionals (CIPP) suggests using payslip messaging to inform employees about NIC reductions and avoid confusion.
It’s research shows payslip messaging cut further queries by 77% after implementing the health and social care levy.
How the changes impact an employer’s finances is a complicated calculation depending on various factors.
Nisha says employee take-home pay will increase as their NICs reduce, which may alleviate pressure to increase wages or other incentives.
This could reduce your labour costs, and provide some welcome extra liquidity, which you’ll need to forecast and reallocate.
But some experts have urged employers to be cautious about using the NIC cuts as a reason for reducing wage rises, given the context of continuing inflation and high overall taxation.
What’s changing for the self-employed?
From 6 April 2024, Class 4 NICs for self-employed people will fall from 9% to 8%.
Also from that date, self-employed people with profits above £12,570 will not be required to pay Class 2 NICs, but they can continue to access contributory benefits, including the state pension.
Those with profits between £6,725 and £12,570 will also retain access to contributory benefits.
The government says the cuts to Class 2 and Class 4 will save £350 for the average self-employed person on £28,200 a year in 2024/25.
It says it has “effectively abolished” Class 2 NICs.
But those with profits under £6,725, and others who pay Class 2 NICs voluntarily, will still be able to do so.
The Association of Independent Professionals and the Self-Employed (IPSE) is concerned about this wording.
Director of policy Andy Chamberlain says: “Low earners may hear Class 2 NI is being ‘abolished’ and think they no longer need to pay it.
“If they mistakenly stop paying voluntary Class 2, they may later find they are not entitled to the state pension.”
Andy says removing Class 2 NICs for those with profits over £12,570 is “a nice tax saving and an even better simplification – it’s one less tax to worry about. But the government must find a way to avoid low earners falling through the cracks unwittingly”.
He adds: “I think the government will try to get rid of Class 2 altogether – abolish it properly – and give those paying it voluntarily another route to secure their entitlement.
“There already is another way to do this, via Class 3 NICs. But that is more expensive, which is why the government hasn’t yet abolished Class 2 completely.
“Ideally, they will find a way for low earners to keep their entitlement without paying more.”
This will probably mean “decoupling completely” the already vanishing link between NI and contributing benefits, says Andy.
What should self-employed people do now?
Self-employed individuals have longer to prepare for the NIC changes – but they also have to wait a long time to get the benefits.
Class 2 and Class 4 NICs are paid as part of your Self Assessment, so the changes will be part of the tax calculation for your 2024/25 tax return.
Catherine Heinen, technical content writer at TaxAssist Accountants, says this means you won’t see the benefit of these cuts until 31 January 2026.
This is because Self Assessment payments, including National Insurance, are due by 31 January following the end of the relevant tax year.
Catherine adds that, although the cuts will put some welcome money in self-employed people’s pockets, frozen tax bands mean many still face increased tax bills.
“All eyes will be on the Chancellor in the March Budget to see if he can provide further relief,” she says.
Nevertheless, the new National Insurance rates could affect your financial position, so you may want to prepare for the changes now or soon by calculating how they will affect your overall tax liability.
“You may want to review your projected income and expenses in light of the changes, and adjust your budget accordingly,” says Nisha Prakash.
“A tax calculator can help you estimate how much you will save under the new rates. If you expect a saving, you could plan how to use that, for example, to reinvest in business growth.”
If your profits are low, now may also be a good time to reassess whether you need to make voluntary NICs to top up your state pension entitlement, especially if you have gaps in your National Insurance record.
You can check your state pension forecast to see how much you could get and when.
With pressures of inflation and higher interest rates, many businesses and self-employed people are grateful for any help they can get from the government.
The National Insurance cuts coming in throughout 2024 provide that.
But exactly how they affect each employer and self-employed person depends on a wide range of factors.
The changes have certainly set a stiff test for small employers to get their systems ready in time, and using a well-prepared payroll software provider will prove to be invaluable.
The faster you can get systems embedded the better, because the Chancellor may have more “benefits/challenges” in store for small businesses in the Spring Budget on 6 March 2024.
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