The Chancellor’s January 2024 NI cut was the headline-grabbing measure from last week’s Autumn Statement. But what impact will the change have on contractors?
What types of National Insurance rates will be cut in 2024?
Several NI rates are set to change next year as a result of changes announced in the Autumn Statement. They apply to both employees (including company directors), and the self employed (sole traders and members of a partnership).
Class 1 Employees’ NICs
This is a tax paid by individuals on salaries. The current rate of 12% on salaries between £12,570 and £50,270 will be cut to 10% from January 6th 2024. The 2% rate on wages over £50,270 remains unchanged.
This type of tax is automatically deducted from your salary via your payroll system, for both umbrella and limited company workers.
Class 2 NICs (for sole traders)
Class 2 NICs are currently £3.45 per week on profits of £12,570 or more each year. This Class of NI will be abolished altogether from April 6th 2024.
Class 4 NICs (for sole traders)
The rate will be cut from 9% to 8% from 6th April 2024 on profits between £12,570 and £50,270. Profits above this threshold remain taxed at 2%.
How does the Class 1 Employees NIC cut affect contractors?
This depends entirely on your salary level.
Contractors who work via their own limited companies usually pay themselves a modest salary and extract most of the company’s profits as dividends (which are not subject to employees’ NICs).
So, you will not benefit from the NI cut unless your salary is above £12,570.
On the other hand, if you’re an umbrella company contractor, your entire salary is subject to standard PAYE deductions – income tax and NI.
The NI cut applies to salaries between £12,570 and £50,270 (£37,700).
- Currently, you pay 12% on £37,700 = £4,524.
- At 10%, you pay £3,770.
- So, you could save up to £754 per year if you are a higher rate taxpayer.
As the NI cut takes place during the tax year, the annualised employees’ NI rate for 2023/4 is actually 11.5%. Assuming no further changes are made beforehand (another budget, perhaps?), the 10% rate will apply for the whole 2024/5 tax year.
Limited company owners left out in the cold again
Limited company owners will perhaps feel aggrieved that the Chancellor has left in place a previous rise to dividend tax – which was put in place at the same time as the April 2022 NI rise.
From April 2022, the rates of Class 1 Employees and Employers NI were both raised by 1.25 percentage points. Simultaneously, dividend tax rates were also hiked by 1.25%.
While the NI hikes were both reversed on 6th November 2022, the dividend tax hike remained (and remains) in place.
The tax benefits associated with working via a limited company have virtually disappeared entirely following over seven years of sustained attacks from successive governments – from the April 2016 dividend tax rise onwards.
Sole traders, too, may wonder why they have to wait 3 months longer than employees to enjoy their NI cut.
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