A reduction in the main rates of Primary Class 1 and Class 4 National Insurance contributions and the removal of the requirement to pay Class 2 National Insurance contributions
Published 23 November 2023
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Who is likely to be affected
From 6 January 2024 all employed individuals liable to pay National Insurance contributions, with earnings over the Class 1 Primary Threshold of £12,570. From 6 April 2024 self-employed people with profits above £12,570 and who are liable to pay Class 2 and Class 4 National Insurance contributions.
General description of the measure
This measure reduces the main rate of employee Class 1 National Insurance contributions by 2 percentage points from 12% to 10% from 6 January 2024.
For the self-employed it will reduce the main rate of Class 4 National Insurance contributions by 1 percentage point, from 9% to 8%, and remove liability to pay the weekly Class 2 flat rate for those with profits above £12,570 from 6 April 2024, while ensuring they will retain access to contributory benefits including the State Pension (as is currently the case).
Those with profits under £6,725, who pay Class 2 National Insurance contributions voluntarily, will also retain access to contributory benefits including the State Pension.
Policy objective
The objective of this policy is to reduce the main rate of National Insurance contributions paid by employees over the Primary Class 1 threshold, and to reduce the main rate of Class 4 National Insurance contributions paid by those liable to pay Class 4 National Insurance contributions, and to remove liability to pay Class 2 National Insurance contributions.
Individuals who can currently pay Class 2 National Insurance contributions voluntarily will still be able to do so.
These changes deliver a tax cut for working people and simplify the tax system by removing the liability for self-employed people to pay Class 2 National Insurance contributions.
Background to the measure
This measure was announced at Autumn Statement 2023 to reduce the main rate of employee Class 1 National Insurance contributions by 2 percentage points from 6 January 2024.
It also reduces the main rate of Class 4 National Insurance contributions by 1 percentage point and removes the liability for self-employed people to pay Class 2 National Insurance contributions from 6 April 2024.
Those with profits above £6,725 will continue to get access to contributory benefits including the State Pension through a National Insurance credit without paying National Insurance contributions as they do currently.
Those with profits under £6,725, who pay Class 2 National Insurance contributions voluntarily to get access to contributory benefits including the State Pension, will continue to be able to do so.
Detailed proposal
Operative date
The reduction in the main rate of employee Class 1 National Insurance contributions will take effect from 6 January 2024.
The reduction in the main rate of Class 4 National Insurance contributions and removal of liability for self-employed people to pay Class 2 National Insurance contributions will take effect from 6 April 2024.
Current law
Current law is included in sections 8(2)(a), 11 and 15(3ZA)(a) of the Social Security Contributions and Benefits Act 1992 and their Northern Ireland equivalents, sections 141 and 143 of the Social Security Administration Act 1992, section 129 of the Social Security Administration (Northern Ireland) Act 1992 and Regulations 8, 21, 100 and 131 of the Social Security (Contributions) Regulations 2001.
Proposed revisions
This measure amends section 8(2)(a) of the Social Security Contributions and Benefits Act 1992 and the Northern Ireland equivalent to reduce the main primary Class 1 National Insurance contributions rate from 12% to 10% from 6 January 2024.
From 6 January 2024 this measure amends regulation 131 of the Social Security (Contributions) Regulations 2001 to reduce the Married Women’s reduced main rate of primary Class 1 National Insurance contributions rate from 5.85% to 3.85% and introduces a blended rate of Primary Class 1 for Married Women directors and their Annual Maximum of 5.35% for the tax year 2023 to 2024.
This measure applies a blended rate 11.5% of Class 1 National Insurance contributions to the Annual Earnings Period for directors for tax year 2023 to 2024 where the earnings period is as specified in regulation 8(2) to (5) of the Social Security (Contributions) Regulations 2001. A blended rate approach has been adopted for in-year changes where appropriate, when National Insurance contributions liability is assessed on an annual basis. The blended rate will apply from the start of the 2023 to 2024 tax year, but has been set at a level such that its effect is equivalent across the tax year to the rate cut received by those who are employed and paid on a weekly or monthly basis.
This measure amends regulation 21 of the Social Security (Contributions) Regulations 2001 to specify that Step 2 in the Annual Maximum calculation should apply the blended 11.5% main Class 1 rates for tax year 2023 to 2024.
From 6 April 2024 this measure will amend section 15(3ZA)(a) of the Social Security Contributions and Benefits Act 1992 to reduce the main Class 4 rate from 9% to 8%, and will make consequential changes to section 11, 141 and 143 of the Social Security Administration Act 1992 and the Northern Ireland equivalents to remove references to the Lower Profits Threshold and the liability for self-employed people to pay Class 2 National Insurance contributions.
Summary of impacts
Exchequer impact (£ million)
| 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 | 2028 to 2029 | |
|---|---|---|---|---|---|---|
| National Insurance contributions: 2% cut to the main rate of Class 1 employee National Insurance contributions from January 2024 | -2,230 | -8,715 | -8,650 | -8,835 | -9,055 | -9,325 |
| National Insurance contributions: 1% cut to the main rate of Class 4 self-employed National Insurance contributions from April 2024 | 0 | -345 | -385 | -330 | -330 | -340 |
| National Insurance contributions: abolish Class 2 self-employed National Insurance contributions liability from April 2024 | 0 | -380 | -465 | -380 | -375 | -370 |
These figures are set out in table 5.1 of Autumn Statement 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2023.
Economic impact
The macroeconomic impacts on the labour market were assessed by the OBR as part of the Autumn Statement 2023. In their November 2023 Economic and Fiscal Outlook (EFO), the OBR estimated that the reduction to National Insurance contributions will increase hours worked by new and existing employees by 0.3%, equivalent to an additional 94,000 full-time workers and boost real household incomes by around 0.5% at the end of the forecast. The measure is expected to increase potential output by almost 0.2% from the 2024 to 2025 tax year.
Impact on individuals, households and families
The impact analysis that follows relates specifically to the impact of the legislative provisions outlined above. Gains are presented compared to the National Insurance contributions liabilities individuals would have faced if these rates were not enacted.
This measure will have a positive impact on individuals, households and families across the United Kingdom by providing a tax cut for around 29 million individuals in tax year 2024 to 2025.
An average employee on £35,400 will receive a tax cut in the 2024 to 2025 tax year of over £450, and an average self-employed person on £28,200 will save £350 in the 2024 to 2025 tax year. Actual impacts for individual taxpayers will vary according to individual circumstances.
This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
National Insurance contribution changes apply regardless of personal circumstances or protected characteristics such as sex, race or disability. Equalities impacts will reflect the composition of the National Insurance contributions paying population.
Impact on business including civil society organisations
Ongoing costs are likely negligible.
One-off costs for businesses will include familiarisation with the change and changes to payroll software to implement the Class 1 changes. Depending on the type of payroll software employers use, impacts may include updating software or systems to reflect the change and updating returns and employee payroll records, the cost of which may be passed onto customers.
If some employers are unable to update their payroll software before 6 January 2024, they will be required to run their payroll retrospectively for past periods where higher National Insurance contribution rates had been incorrectly applied. Although individuals should contact their employer for refunds as a first port of call in all circumstances, there may be circumstances where individuals may need to apply to HMRC for a refund (for example, if their employer is no longer trading, or if an individual has moved roles and their previous employer has confirmed they are unable to issue a refund retrospectively themselves). There are not expected to be any continuing costs.
Customer experience is expected to remain broadly the same as this measure does not significantly alter how the majority of employers interact with HMRC. This measure is not expected to affect civil society organisations.
Operational impact (£ million) (HMRC or other)
This will require changes to HMRC IT systems. HMRC do not expect costs to be significant.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax receipts.
Further advice
If you have any questions about this change, please contact [email protected].
Declaration
Nigel Huddleston MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.