Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

A cut to National Insurance (NI) rates announced last year is now in force, meaning there’ll be a little more left in employees’ pay packets this month. 

The main rate of primary Class 1 National Insurance contributions for employees was lowered from 12% to 10% on 6 January this year. In April, there will also be cuts to NI rates for the self-employed.  

The cuts were announced with fanfare in the Government’s Autumn Statement in November. It was only a partial victory for workers. Other changes that the Government has made - notably a freeze on NI and income tax rates until 2028 - mean that employees are likely to pay more tax on income in the years ahead than they would if tax bands were to rise with inflation.1 

Nonetheless - most pay packets now will see a cash boost from the cut to NI. And by acting to lock in that extra cash and put it to use via investments, employees could add thousands - even tens of thousands - of pounds to their retirement funds, although investment returns are not guaranteed.   

NI rate cut - what is it worth?

Despite its name, National Insurance for employees works more like a tax on income. NI applies at different rates on different levels of earnings - much as Income Tax does. Most people working for an employer pay Category A NI contributions. There are some instances when different rates apply, notably if you are over your State Pension age, and you can view those here.   

For Category A contributions, no NI is charged on earnings up to £1,048 a month. Earnings between £1,048.01 and £4,189 a month are charged at 10% - the new lower rate - and then earnings above £4,189 attract 2% NI. 

The cut in the rate from 12% to 10% is therefore worth £754 a year to anyone earning £50,270 or more a year and paying Category A contributions. It is worth less if you earn less than that. For example, those on £35,000 save £448.60 a year. Those on £20,000 save £148.60.

Putting that extra cash to work - and getting another boost from the taxman

By putting any savings made from the NI cut towards long-term savings employees can improve their future financial security. All they need to do is to divert the increase in their pay packet from December to January into investments. 

And if they do this via a pension, the boost can be even greater. Here’s what we mean. 

For someone earning £50,270 a year or more, the NI cut will boost their take-home pay by £62.833 a month. By paying this extra amount into a pension they will also benefit from Pension Tax relief. Tax relief at the basic rate of tax is added automatically, meaning the total paid into a pension rises to £78.54.4  

Below you can see what this extra has the potential to turn into if invested over many years. This is based on a 5% investment return, which is not guaranteed and after all fees. The lines show the totals achieved, with contributions starting from ages 25, 35, 45 and 55 until age 65.

Even those aged 55 with only 10 years to make contributions could increase their pension saving by more than £12,000. This rises to around £32,000 for those starting aged 45 and to around £65,000 for those starting aged 35.  Anyone aged 25 and able to invest the maximum NI saving into a pension could add more than £119,000 to their retirement fund.  

And the benefits don’t end there. These models take account only of the 20% basic rate tax relief that is added automatically when contributions are made via a pension - either a workplace scheme or private pension, such as a SIPP. If you are a higher or additional rate taxpayer - as would be the case if you earn enough to gain the maximum benefit from the cut to NI - then a further 20% or 25% relief is available. This can be obtained via self-assessment - either as a cash payment or reduced tax code in future years - or is automatic inside some workplace pensions. 

Money saved inside pensions is available from age 55 - rising to age 57 from April 2028 - when 25% of it is available tax-free (up to a limit of £268,275) and the rest is taxed at your marginal rate of Income Tax.  

Successful long-term saving ultimately requires that you are willing to sacrifice money now in order to commit it to the future, by which time it will hopefully have benefited from years of investment growth. It’s easier to escalate your saving gradually than all in one go, and moments when you see your take home pay rise - via a pay rise, a job change or a tax cut as with this NI change - can be great times to escalate your saving because you will feel less of a hit in your pocket right now. 

Don’t let this opportunity from the taxman go to waste. 

Source: 

1,2 IFS, 5 January 2024 

3 £754/12 = £62.83 

4 £62.83 x 1.25 = £78.54

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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