Starting on Saturday, January 6, national insurance on employee salaries between £12,570 and £50,270 will be reduced from 12 per cent to 10 per cent.
Chancellor Jeremy Hunt made the announcement in the Autumn Statement, and the move will affect almost 27 million UK payroll employees.
Following the adjustment, individuals making the average salary in the UK of £35,000 will save £450 a year, or £37.38 a month.
NI will continue to be two per cent on income and profits over £50,270.
But what is national insurance and where does the money you pay actually go?
What is national insurance?
National insurance is a tax on income that most people in the UK pay, which goes towards funding welfare and benefits.
You will most likely need to make national insurance contributions (NIC) if you are employed, self-employed and over the age of 16 but below state pension age.
In most cases, national insurance payments go toward benefits including your state pension, maternity leave and bereavement support.
The amount of NI that people pay depends on how much they earn and whether they are employed or self-employed.
When do you pay and when do you stop?
If you are between 16 and state retirement age, and in some form of employment and earning a certain amount, you will be expected to pay national insurance.
Employees who earn at least £242 per week and fit into the age criteria will need to pay national insurance.
If you're employed, national insurance contributions are usually taken automatically as part of your monthly or weekly tax deductions.
Self-employed people in the UK need to pay national insurance contributions if they earn a profit of more than £12,570 a year. This is usually done through an annual self-assessment.
National insurance rates are divided in "classes" based on earnings and employment status. For instance, employees usually fall into the Class 1 category, while self-employed people may be considered Class 4.
You no longer need to pay national insurance when you reach state pension age.
How much do you pay and how will that change?
As it stands, people who are in the Class 1 category (employed by a business) pay the following NI rates. These rates will change in January.
- 12 per cent of earnings between £242 to £967 a week.
- 2 per cent of earnings over £967 a week.
What is Class 2 National Insurance?
Self-employed people (Class 2 and Class 4) are expected to pay these national insurance contributions:
- £3.45 a week (Class 2)
- 9 per cent on profits between £12,570 and £50,270 (Class 4)
- 2 per cent on profits over £50,270 (Class 4)
Special considerations and rates exist if you work in certain roles, such as working as an exam moderator. So, it's best to double-check when making a self-assessment.
Beginning in April, there are also reductions in national insurance for the self-employed.
This entails eliminating Class 2 contributions and lowering the Class 4 contribution rate from nine per cent to eight per cent for the earnings range of £12,570 to £50,270.
