The government has been under pressure to introduce tax cuts in recent years as many people have seen their bills increase.
In November 2023, the BBC reported that the tax burden was at its highest level since the second world war. This is likely because Income Tax thresholds are frozen until 2028, while average earnings have increased.
As a result, more of your earnings could be pushed into the taxable range, meaning that your Income Tax bill is higher. This is known as “fiscal drag”.
Fortunately, the 2023 Autumn Statement brought some positive news as the government announced a National Insurance (NI) cut.
Although many people are still feeling the effects of fiscal drag, the additional funds from the cut in NI contributions (NICs) could help you support certain areas of your financial plan.
You might decide that you would benefit from the extra cash now, but you could also use it to increase your pension savings.
The rate of National Insurance reduced from 12% to 10% on 6 January 2024
Jeremy Hunt announced the reduction in NICs in his 2023 Autumn Statement and it came into effect on 6 January 2024.
Previously, if you were employed, you paid:
- 0% NICs on weekly earnings up to £241
- 12% NICs on weekly earnings between £242 and £967
- 2% NICs on weekly earnings above £967.
However, from 6 January onward, you now pay 10% on weekly earnings between £242 and £967, instead of 12%.
If you are self-employed, this tax cut does not apply to you. The chancellor did announce a reduction in Class 4 NICs too, but this will not come into effect until the beginning of the new tax year on 6 April 2024.
The cut for employed people could amount to a significant saving over the course of a year. According to MoneyWeek, around 27 million people stand to benefit from the reduction in NICs.
The following table shows how much you could save, depending on your earnings:
| Annual earnings | 12% NICs cost | 10% NICs cost | Potential annual saving |
|---|---|---|---|
| £30,000 | £2,091.60 | £1,743 | £348.60 |
| £40,000 | £3,291.60 | £2,743 | £548.60 |
| £50,000 | £4,491.60 | £3,743 | £748.60 |
| £100,000 | £5,518.60 | £4,764.60 | £754 |
Source: Money Week
It is important to note that this tax cut may not be as attractive as it first appears because fiscal drag could mean that your tax bill has risen in recent years.
That said, if you contribute the additional funds to your pension, you could see a notable increase in your retirement savings in later life.
A 2% increase in your pension contributions could leave you £108,000 better off in retirement
If you have an annual salary of £50,000, you could save £748.60 a year as a result of the cut in NICs. This is around £62 a month.
Having this extra money in your bank account may be useful if your budget is especially stretched. You could also use it to clear expensive debts faster if you have any.
However, £62 won’t normally go that far and you could easily spend it without making any significant improvements to your lifestyle. If you don’t need it urgently, it may be more worthwhile to contribute it to your pension instead. Doing so might have a more profound effect on your lifestyle in retirement.
According to Standard Life, a 22-year-old earning a salary of £25,000 and paying the standard monthly auto-enrolment contributions – 5% employee and 3% employer – would have a retirement pot of £434,000 at 66.
These figures assume 3.5% annual salary growth, 5% annual investment growth, and 1% annual management fees.
If the same person increased their own contributions by 2%, they could build £542,000 in their retirement pot by 66 – a difference of £108,000.
Although these figures are based on somebody adjusting their contributions from a young age, it does demonstrate the difference that even a modest change to your pension contributions could make.
If you were to put the 2% that you saved on NICs into your pension, your take-home pay would remain the same as it was before the cut came into effect. Yet, you may receive tax relief on those contributions and your employer might match them too.
As a result, the funds could be “worth” more in your pension than they would in your bank account each month. It could also mean that you build more pension savings and enjoy a better quality of life in retirement.
You could consider investing the funds if you have already used your Annual Allowance
In the 2023/24 tax year, your “Annual Allowance” – the amount you can contribute to your pension without triggering an additional tax charge – is £60,000 or 100% of your earnings, whichever is less.
If you are a high earner or have flexibly accessed a DC pension, your Annual Allowance may be lower.
Increasing your pension contributions may not be particularly tax-efficient if you have already used your Annual Allowance.
Fortunately, you could still use funds from the NI cut to build wealth for the future if you invest them instead.
Figures from the HSBC investment calculator show that if you invested £62 a month for 10 years, adopting a medium level of risk, you could have £10,700 if market conditions are good.
If market conditions were average, they estimate that you could build £9,100 in your investment account and even in poor market conditions, you’d still have £7,150.
While these figures are only estimates, they demonstrate the potential benefits of investing extra funds each month, even if it is only a small amount.
Get in touch
We are here to help if you need guidance about your retirement savings.
Email us at advice@milstedlangdon.co.uk for more information.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.