Top up your pension with National Insurance cut

Announced by Chancellor Jeremy Hunt in the November 2023 Autumn Statement, the National Insurance (NI) cuts are now in effect as of 6 January 2024, with further cuts for self-employed taxpayers scheduled to arrive 6 April 2024. 

For those who can afford it, these cuts to National Insurance rates could present a perfect opportunity to increase your pension over time. A basic-rate taxpayer will in theory see their income rise by up to £62.83 a month, as a result of the NI reduction. If they pay this straight into their pension, it will be worth £78.53 a month because of the 20% tax relief from the Government on contributions. Over time, these contributions could quickly compound into something significant for your future financial security.

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What are National Insurance Contributions?

National Insurance (NI) is an umbrella term for universal health care, unemployment benefits and the public pension program.

National Insurance Contributions (NICs) are a form of tax that employees and employers pay to the Government through payroll deductions. NICs are paid automatically through the PAYE (Pay As You Earn) system, which deducts an amount based on a percentage of your income, and this generally continues until you reach retirement age. Employees are able to make additional voluntary payments to increase the pension amount that they will be entitled to receive. 

NICs are collected in order to fund various state benefits, such as the NHS and state pensions.  

The changes to National Insurance rates

There are three changes to NICs which were announced in the 2023 Autumn Statement. These changes are:

• A cut in the main rate of NICs paid by employees (‘primary Class 1 NICs’) from 12% to 10%. This rate cut applied from 6 January 2024
• A cut in the main rate of NICs paid by the self-employed (‘Class 4 NICs’) from 9% to 8%. This rate cut would apply from 6 April 2024.
• Cancelling the requirement of the self-employed to pay the flat rate NICs charge (‘Class 2 NIC's’), which applies when someone’s annual profit exceeds a set threshold (the ‘lower profits threshold’). This threshold is currently £12,570. This change would take effect from 6 April 2024.

These measures extend and apply to the whole of the UK. All workers earning over the annual national insurance threshold of £12,570 have seen a fall in their national insurance tax bill as of January 2024.

Source: Blick Rothenberg. 

How the NI cut could boost your pension?

We have calculated that a 25-year-old basic-rate taxpayer who works and saves until they are 67 years old could end up with as much as £118,900 extra in their pension pot. And even if you’re later in life, for a 55-year-old the uplift could be an extra £15,405. So still worth it, no matter at what point you start to make the extra saving. Although clearly the younger you are the bigger the increase to your pension pot.

For higher-rate taxpayers, the figures are substantially higher. The original £62.83 contribution turns into £104.72 because of the 40% tax relief they get. This means that, for example, a 25-year-old higher-rate taxpayer could be as much as £158,550 better off by age 67. For a 55-year-old, there could be an extra £20,543.

There are some caveats to these calculations. The figures assumes no further changes to NI contributions and that these pots grow by 5% before any fees are deducted. 

There are also other factors to consider that could increase the final figures such as employers matching or partly matching extra contributions made by employees, resulting in an even bigger pot over time.

Instead of continuing to work until they reach their planned retirement age, if you divert the extra cash into your pension, you could in theory retire from work a few years earlier as an alternative but feasible strategy, giving you more time to enjoy the best years of your retirement.

Due to the NI reduction involving “class 1” contributions made on earnings received by anyone between the age of 16 and state pension age who is getting more than £242 a week from one job, it means that employees now pay 10% on earnings between £242 and £967 a week.

If you’re thinking about your retirement plans, we’re offering anyone a free initial consultation and cash flow analysis worth up to £500 for those with £100 000 or more in pensions, investments and savings to help with retirement planning. Why not get in touch for a free non-committal initial consultation where you can discuss your savings plans with one of our accredited advisers who will be happy to guide you through the process. Alternatively, you can give us a call on 0333 323 9065 to get in touch with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

The Financial Conduct Authority (FCA) does not regulate tax advice.