The rate of National Insurance will reduce by 2p in April. While it’s argued this won’t offset the stealth income tax rise, experts suggest people can use it to bolster their pension pots.
This NI cut marks the second 2p reduction in 2024. The rate dropped from 12 percent to 10 percent in January and will further decrease to eight percent on April 6.
The self-employed will also benefit from a 2p cut to Class 4 NICs to 6 percent.
However, Lucie Spencer, financial planning director at wealth management firm Evelyn Partners said canny savers can use this latest measure to help “beat” the fiscal drag rise in income tax to “turbo-charge” their retirement savings – and all without sacrificing take-home pay.
Ms Spencer said: “Given the cost of living pressures everyone has had to endure over the last couple of years, it will hardly be surprising if most earners gratefully pocketed that January cut and let it slide into the current account balance.
“But many earners can be clever about how they use this one. Those whose general financial situation is in decent order – with unsecured debts clear and a cash savings buffer in place – could significantly increase their long-term wealth by simply paying it into their pension, leaving their take-home pay unchanged.”
According to Evelyn Partner’s figures, a 25-year-old on the average employed salary of £35,000 could leave themselves nearly £80,000 better off by age 67 without actually sacrificing anything right now.
Meanwhile, a 35-year-old on £60,000 could be £100,000 better off by age 67.
Ms Spencer explained: “Taxpayers might be aware that frozen and falling income tax allowances and thresholds since 2022 mean that millions of earners are paying more in income tax – even though the rates have not changed – and this trend will continue until at least 2028.
“This effect will wipe out the gains from the NI cuts for many taxpayers in a year or two from now, meaning that the overall direct tax burden is on the up.
“One of the few ways to mitigate against rising income tax is to pay into a pension because contributions benefit from tax relief at the earner’s marginal (or highest) rate of income tax.
“Depending on their pension system, the saver will either get basic rate tax automatically and reclaim the rest if they are a higher or additional rate taxpayer. Or they pay contributions out of gross income and get all tax relief automatically.”
Either way, Ms Spencer noted: “The effect is much the same: you legitimately avoid paying income tax on a portion of your income while also boosting your pension pot.
“This is why when someone receives a pay rise, a financial adviser will quite often counsel them to put part or all of it into their pension.”
Ms Spencer said the benefits are “particularly significant” for younger savers.
Increased pension contributions at the beginning of the retirement saving journey can significantly impact the eventual size of a pot, thanks to the power of compounded returns.
Evelyn Partner’s following figures assume that earners increase their monthly pension contribution by the amount they take home, which is set to increase after the 2p Budget cut to NI. That is then boosted by pension tax relief and grows at an annual investment return of five percent.
Ms Spencer said: “It’s quite compelling to think that even a 45-year-old on £40,000 stands to benefit by more than £27,500 without lifting a finger in terms of eating into their disposable income. A 35-year-old earning £60,000 could end up nearly £100,000 better off by age 67.
“That could equate either to retiring a few years earlier than planned or to a much more comfortable retirement than was ever envisaged.”
According to Ms Spencer, all an employee needs to do is figure out how much their monthly take-home pay is set to increase in April due to the latest 2p NI cut.
They can then work with their HR department or pension provider to figure out the necessary adjustment to their contribution rate so that the additional amount goes into their pension.
Ms Spencer said: “The net pay landing in their bank account each month – which was already given a boost by the same amount in January – can then remain unchanged.
“Through this increase, they may also benefit from increased contributions from their employer, therefore further increasing their pension fund.”
While this reflects a net pay scheme, where employees pay contributions gross of income tax, Ms Spencer noted: “The principle extends to anyone paying into a pension.”
