Pay As You Earn employees have already seen a tax cut in the class 1 National Insurance Contributions (NIC) that they pay. As for the self-employed, they will have to wait until we submit their 2024/25 tax return to benefit from their main tax cuts.
Tax cuts for employees
If you are a PAYE employee, you will already be benefiting from a tax cut on Class 1 NIC. From January 6, 2024, the amount of Class 1 NIC people had to pay fell from 12% to 10%, and with the 2024 Spring Budget came another 2% reduction in Class 1 NIC from 10% to 8%, which will come into effect from April 6, 2024. You start paying your class 1 NIC when you earn past the personal allowance of £12,570. Here's a table showing how it will affect the tax you pay if you earn £20,000 vs £50,000 a year.
2023 Class 1 NIC due (12%) | 2024 Class 1 NIC due (10%) | 2025 Class 1 NIC due (8%) | Savings from 2023 to 2025 | |
£20,000 yearly earnings | £891.6 | £743 | £594.4 | £297.2 |
£50,000 yearly earnings | £4491.6 | £3743 | £2994.4 | £1497.2 |
Tax cuts for self-employed
Self-employed earners will benefit from a few tax cuts. The earliest is for their 2023/2024 tax return, which we can file from 06 April 2024. Class 4 NIC will be paid on earnings above £12,570 rather than £11,908.
The next benefit will appear in their 2024/2025 tax return, which covers the period from 06 April 2024 to 05 April 2025. Once again, regarding Class 4 NIC, the amount due on earnings above £12,570 will be reduced from 9% to 6%. It's worth mentioning that earnings above £50,270 will still incur the normal 2% class 4 NIC.
The 3rd and final benefit for the self-employed comes into play in their 2024/2025 tax return at the same time as the 6% class 4 NIC does. This particular benefit removes the need to pay class 2 NIC entirely. Class 2 NIC in the 2023/2024 tax return will cost individuals £179.40 to get their yearly stamp for state pension entitlement. However, for the 2024/2025 tax return, as long as you earn over £12,570, the need to pay Class 2 NIC will disappear entirely! Also, you can earn between £6725 to £12,570 in the 2023/2024 and 2024/2025 tax returns and get a credited year without paying class 2 NIC, but anything below that requires voluntary class 2 NIC payments if you wish to have a credited year towards your state pension entitlement.
2024 Class 4 due (9%) | 2024 Class 2 Due | 2025 Class 4 Due (6%) | 2025 Class 2 Due | Yearly savings on tax | |
£20,000 yearly earnings | £668.7 | £179.40 | 445.8 | £0 | £402.3 |
£50,000 yearly earnings | £3368.7 | £179.40 | £2245.8 | £0 | 1302.3 |
Conclusion Short and Sons Accountants must always remain on top of the latest tax legislation, and we feel that it's important for people to know about tax information that will directly affect them. We hope this article has explained how these changes will affect you, and we urge you to look at our other tax tips and keep an eye out for anything that applies to you!