Millions to get a pay rise worth up to £754 – and you could be £10,000 better off
MILLIONS will get a pay rise from today – and it could make them tens of thousands of pounds better off in the long run.
The government cut the main National Insurance (NI) rate earlier this month.
The 12% rate of employee NI, also known as class 1 NICs, was reduced to 10% on January 6, but most households will start to notice this today as that is when most businesses pay their staff.
Twenty-seven million workers who pay the taxes will see their income increase in bank accounts and paychecks.
The average worker earning £35,400 a year will save £450, while some will see their wages rise by as much as £754.
If you earn less than £242 per week, which equates to £12,570 per year, you will see no difference in your pay as you will not be paying NI.
Those who have reached state pension age, currently 66, will also see no change from today.
Anyone who sees an increase in their income after the NI cut could also be tens of thousands of pounds better off in the long term.
That's if you put the extra money into a pension pot or use it to pay off part of your mortgage.
Use your extra income for a pension
Basic rate taxpayers will see their income increase by up to £62.83 from today thanks to the cut in NICs.
But instead of holding onto the money now, you can add it to a company pension.
Doing this every month would increase its value to £75.39, as pension savings benefit from a 20% government tax credit.
Also remember that money put into a pension pot can grow in value, meaning you get extra money on top of what you put into it.
Of course, pensions can also shrink in size as a result of external factors such as a poor economic situation or new laws.
Overall, the extent to which you can increase your pension by adding extra money from today's reduction depends on how long you have to work before you retire.
The younger you are when you start, the more you will accrue when you start claiming.
A 25-year-old could have an extra £134,389, according to figures from asset manager Evelyn Partners.
Meanwhile, a 65-year-old with just two years left until retirement could enjoy a £2,064 boost.
These figures assume your savings grow by 5% every year.
Use your income to reduce your mortgage bill
With the extra money you earn today, you can pay off your mortgage sooner.
Data from bank Santander shows that an employee on an annual salary of £30,000 who spends his entire savings of £29 a month on his mortgage would save £7,405 in interest.
That's based on a 25-year mortgage of £200,000 with an interest rate of 4.7%.
Adding £29 per month from now on would mean you'd be mortgage-free more than a year sooner than if you hadn't made the change.
Santander also said you can overpay as little as £10 per month and still reduce your overall mortgage bill.
Doing this would reduce the amount by £2,500 and shorten the mortgage term by four months, the report said.
To unlock your total savings, you'll need to maintain additional repayments over the life of the mortgage, even if NIC rates rise or fall.
The calculation also assumes the same mortgage interest rate for the duration of the term.
Before you overpay on your mortgage, make sure you won't incur early repayment fees.
What is National Insurance?
National Insurance is a tax on your income used to fund state benefits.
This includes the state pension, statutory sick pay, maternity leave and unemployment benefits.
If you are a British national, you should automatically receive an NI number and card before you turn 16.
This number allows the government to keep track of your income and apply the correct amount of tax.
Who pays for the National Insurance?
You pay National Insurance if you are 16 years or older and:
- an employee earning more than £242 per week
- are self-employed and make a profit of £6,725 or more per year
If you are employed, NICs will be deducted from your monthly salary, but self-employed people must pay this through self-assessment.
If you are employed, you can see your contributions on your pay slip.
Once you reach state pension age, you no longer have to pay it.
There are different types of National Insurance – sometimes called 'classes' – and the type you pay depends on your employment status and how much you earn, and whether there are any gaps in your National Insurance file.
What are the current NIC thresholds and how much do I pay?
The threshold for national insurance benefits is currently £12,570 per year for salaried workers and £6,725 for the self-employed.
A change in April 2022 saw millions of workers pay 1.25% more NI, but that increase was reversed from November of the same year, saving workers an average of £330 a year.
But interest rates fell from 13.25% to 12% and from 3.25% to 2% – the same as before April 2022.
Most people now pay 12% NICs on all earnings between £242 and £967 per week.
In addition, you must pay 2% on anything you earn over £967 per week, or £4,189 per month.
Those who earn less than these amounts do not have to pay national insurance.
Your pay depends on how much you earn, as it is a percentage of profits between these amounts.
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