Lee McIntyre-Hamilton: Changes to national insurance and the impact on employment

national insurance contributions The new year has already brought some welcome news for employees, with the cut in employee national insurance contributions (NICs) from 12% to 10%. As of 6 January 2024, the cut means that all employees who currently pay NIC will benefit.

The extent of the savings will depend on an employee’s salary, with annual savings of £457 for employees on average earnings of £35,400 and £754 for employees earning over £50,270 per annum. So, employees should see an increase in their monthly net salary.

Is it all good news? Unfortunately, the answer is no. Firstly, the reduction does not directly benefit employers since they will continue to pay secondary (employers) NICs at the current rate of 13.8% on pay and taxable benefits. Arguably, it may take a little pressure off employers when it comes to demand for future pay rises. However, the savings for employees are likely to be small consolation when compared to the sustained cost-of-living rises and the ensuing demands for wage increases.

Furthermore, the cut must be viewed in the context of a creeping counterbalance known as fiscal drag, caused by the government’s freeze in the tax and NIC thresholds until April 2028. While less visible than the headline NIC rate cut, fiscal drag is set to increase costs for both employees and employers over the coming years and warrants their attention.

Until the 2022/23 tax year, governments have normally increased the tax and NIC thresholds annually. The thresholds mark the earnings level at which tax and NICs are paid by low earners, or the point at which it is paid at a higher rate. This annual increase was predominantly to factor in the effect of inflation which, as prices increase each year, erodes individual purchasing power.

However, this all changed after Rishi Sunak, then Chancellor of the Exchequer, announced a freeze in the tax and NIC thresholds at the March Budget 2021 such that, after an extension by current Chancellor Jeremy Hunt, thresholds are now frozen until April 2028. This means no annual increase to factor in the effect of inflation.

The result of this, given that prices and wages are set to continue to rise, is that employees will pay more tax and NICs relative to what they would have paid had the thresholds continued to be increased annually and many are likely to become worse off. Many low earners will find themselves paying tax and NICs for the first time.

Employer costs will also continue to increase since progressively more people will earn above the £9,100 threshold, at which point employer NICs are required. More widely in respect of all employees, employers will pay more NICs as wages continue to increase as compared to the position whereby the £9,100 threshold had been increased annually. Employers are also likely to face increased pressure from wage demands where employees are receiving relatively less net income, given the effects of continue price rises, than they would have done had the tax and NIC thresholds been increased each year.

While fiscal drag has received much less attention that the headline NIC rate cut as we start 2024, employees and employers are very likely to feel its effects over the coming years.

Lee McIntyre-Hamilton is an employment tax specialist at Keystone Law