How much will the 2p National Insurance cut save me and how much is income tax?

The government announced a further 2p cut to National Insurance (NI) in the Budget. However, it is not changing the main income tax rates.

Previous changes to tax rules mean the amount of tax people pay overall is rising.

How much will a 2p National Insurance cut save me?

Chancellor Jeremy Hunt announced the starter rate for NI will change from 10% to 8%, for 27 million workers, from April 2024.

He says this is worth £450 a year to an employee on an average salary of £35,000.

Chart showing the impact of a 2p cut to the starter National Insurance rate

He is also cutting NI for two million self-employed workers. Their rate will fall from 8% to 6%.

The government says the cut is worth £350 to a self-employed person earning £28,200.

What National Insurance changes had already been announced?

Since 6 January, millions of employees have been paying 10% National Insurance contributions on earnings between £12,571 and £50,270. They previously paid 12%.

The government says that when combined with the latest cut, a worker on £35,000 will save £900 a year.

NI on income and profits above £50,270 remains at 2%.

The chancellor had previously said that from 6 April 2024, two million self-employed people would pay 8% on profits between £12,571 and £50,270, down from 9%.

From the same date, they will no longer pay a separate category of NI called Class 2 contributions.

When combined with the cut to 6% announced in the Budget, the government says they will save £650.

NI rates apply across the UK. It is not paid by people over state pension age, even if they are working.

Eligibility for some benefits, including the state pension, depends on the NI payments you have made.

Why are millions paying more tax?

Millions of people will pay hundreds of pounds more in tax because of changes to the tax thresholds. These are the income levels at which people start paying income tax, or have to pay higher rates.

These used to rise every year in line with inflation.

However the tax-free personal allowance – the amount you can earn every year before you have to pay income tax – has been frozen at £12,570 until 2028. Higher-rate tax will continue to kick in for earnings above £50,270.

Freezing the thresholds means that more people start paying tax and NI as their wages increase, and more people pay higher rates.

It will create 3.2 million extra taxpayers by 2028, and 2.6 million more people will pay higher rates, according to the Office for Budget Responsibility (OBR), which independently assesses the government’s economic plans.

Total UK tax take . As a % of the size of the economy. Figures from the time of Autumn Statement 2023.

The OBR expects the government to raise £25.5bn more a year by 2027-28 than if NI and income-tax thresholds had gone up in line with inflation.

According to the IFS, by 2027-28 an employee earning £35,000 “will be paying about £440 a year more in direct tax overall as a result of all the changes to income tax and NI since 2021”.

What are the current income-tax rates?

Income tax is paid on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.

Income tax is also paid on some benefits and pensions, income from renting out property, and returns from savings and investments above certain limits.

The Basic rate is 20% and is paid on annual earnings between £12,571 and £50,270.

The Higher rate is 40%, and is paid on earnings between £50,271 and £125,140.

Once you earn more than £100,000, you also start losing your tax-free personal allowance.

You lose £1 of your personal allowance for every £2 that your income goes above £100,000.

Anyone earning more than £125,140 a year no longer has any tax-free personal allowance.

The additional rate of income tax is 45%, and is paid on all earnings above £125,140 a year.

These apply in England, Wales and Northern Ireland.

Some income tax rates are different in Scotland.

The Scottish Government has already announced that a new 45% band will take effect from April 2024. The top rate will also rise from 47% to 48%.

Who pays most in income tax?

For most families, income tax is the single biggest tax they pay.

But for less well-off households, a greater share of family income goes on taxes on spending, known as indirect taxes.

For the poorest fifth of households, VAT is the biggest single tax paid.

Bar chart showing how much of families’ incomes goes on income tax, NI, council tax, VAT and duties. The chart shows this split for the poorest fifth of households up to the richest fifth.

How do UK taxes compare with other countries like France and Germany?

You can look at the amount of tax raised as a proportion of the size of the economy, or GDP.

In 2022 – the most recent year for which international comparisons can be made – that figure was 35.3%.

That puts the UK right in the middle of the G7 group of big economies.

Bar chart showing tax revenue as a percentage of GDP. The United Kingdom’s tax burden is relatively low compared to other advanced economies, with a value of 35.3% in 2022.

France, Italy and Germany tax more; Canada, Japan and the US tax less.

So in comparison with other countries, the UK is not that highly taxed.

However, overall taxation is high according to historical rates.

At the time of the 2023 Autumn Statement, the OBR said taxes would rise “in each of the next five years to a post-war high of 38% of GDP”.