According to government announcements, there will be changes to social security for both employees and the self-employed in 2024.
In this article we look at the changes in detail and explain what employers and self-employed people need to do now.
Here’s what we cover:
An overview of the changes in social security
Easier social security calculations and lower expenses for employees and the self-employed – that sounds great, doesn’t it?
With the improvements to the social security system taking effect later in 2024, companies have taken them with caution.
In the autumn 2023 statement, the government said:
- From January 6, 2024, National Insurance Contributions (NICs) for Class 1 workers will be reduced from 12% to 10%.
- From 6 April 2024, Class 2 NICs for the self-employed are to be completely abolished and Class 4 NICs are to be reduced from 9% to 8%.
In the Spring 2024 Budget the government said:
- From April 6, 2024, Class 1 NICs for employees would be reduced from 10% to 8%.
- From April 6, 2024, Class 4 NICs for the self-employed would be reduced from 8% to 6%.
What is social insurance?
Social security is a series of tax contributions that employees and self-employed people pay in order to be entitled to certain benefits and the state pension.
Employers also contribute to their employees’ social security contributions.
The government uses contributions to fund public services such as the NHS, unemployment benefit and the state pension.
In reality, the connection to these benefits is disappearing and Social Security has become more of an additional layer to the general income tax.
This is how social insurance works for employees and the self-employed
How much NI you pay depends on your employment status and income.
Employees
For employees, the amount depends on the social security category and the earnings range.
Employee contributions are known as Class 1 NICs and the employer takes these from the employee’s wages.
The employer also pays NICs based on the employee’s income, expenses and benefits, as well as lump sums such as severance pay.
Self-employed
Self-employed people with profits above £12,570 currently pay two types of National Insurance – Class 2 and Class 4. The first is a flat rate of £3.45 per week.
The second is profit-based – currently 9% on winnings between £12,570 and £50,270; and 2% on those over £50,270.
Class 3 NICs are voluntary and are created by people who want to close gaps in their contribution records to ensure entitlement to full benefits such as the state pension.
There are different social security rules for directors of limited companies, sharecroppers and landlords.
What will change for employees in 2024?
In the 2023 Autumn Statement, Chancellor Jeremy Hunt announced changes to National Insurance aimed at cutting taxes for working people and simplifying the tax system.
On 6 January 2024, the main rate of NICs paid by employees fell from 12% to 10%.
This applied to those earning more than £12,570 and would save £450 a year for workers earning an average salary of £35,400.
The lower earning limit – at which employees receive National Insurance credits – has been frozen at £6,396.
This will preserve low-income workers’ access to NIC credits without having to pay contributions.
However, the Chancellor announced further changes to social security in the 2024 spring budget.
From April 6, 2024, Class 1 NICs for employees will fall from 10% to 8%.
What should employers do now?
Review your payroll software
A good payroll software provider should be well prepared, especially if you use cloud software, to ease the pressure on your team.
Check that your provider has made any necessary changes and that you have the latest software version.
For many companies, the changes were not easy.
Nisha Prakash, senior lecturer in financial management at the University of East London (UEL), said: “Adapting payroll systems to the changes could involve software updates, staff training and other administrative changes and costs.”
An article from KPMG said the changes are particularly challenging given the short time frame and the need to reconfigure, test and deploy them in a live payroll environment midway through the tax year.
However, many companies have had similar experiences with the now abolished health and social care levy, and companies can learn lessons from this experience.
Work with your accountant
Alex White, North West region managing partner at accountancy firm Xeinadin, said: “Employers have been in the difficult position of updating their payroll systems in a timely manner.
“Changing software systems rarely happens overnight and is therefore costly and time-consuming.
“Furthermore, the cut could lead to a sharp increase in inquiries from employees requiring refunds for misapplied NICs.
“To reduce administrative burdens, companies should communicate clearly with their accountant or payroll provider to understand the pros and cons of the changes.”
Keep your employees informed
It is also important to keep employees updated on the changes.
The Chartered Institute of Payroll Professionals (CIPP) recommends using payroll messaging to inform employees of NIC cuts and avoid confusion.
The study shows that after the introduction of health and social security contributions, the number of requests for sending payslips fell by 77%.
How the changes affect an employer’s finances is a complicated calculation that depends on a variety of factors.
Nisha says employees’ take-home pay will rise as their NICs fall, which could ease pressure to increase wages or other incentives.
This could reduce your labor costs and provide welcome additional liquidity to forecast and reallocate.
However, some experts have urged employers to be cautious about using the NIC cuts as a reason to reduce pay rises, given ongoing inflation and high overall taxation.
What will change for the self-employed?
It has already been announced that Tier 4 NICs for the self-employed will fall from 9% to 8% from April 6, 2024.
However, the Chancellor announced in the 2024 spring budget that this will fall to 6% from April 6, 2024.
From this date, self-employed people with profits above £12,570 will not have to pay Class 2 NICs, but will still have access to contributory benefits, including the state pension.
Anyone making a profit of between £6,725 and £12,570 will continue to have access to contributory benefits.
The government says it has “effectively abolished” Class 2 NICs.
But those with winnings under £6,725 and others who voluntarily pay Class 2 NICs can still do so.
The Association of Independent Professionals and the Self-Employed (IPSE) is concerned about this wording.
Andy Chamberlain, director of policy, said: “Low earners may hear that Tier 2 NI is being ‘abolished’ and think they no longer have to pay it.
“If they accidentally stop paying Voluntary Class 2, they may later find they are ineligible for the state pension.”
Andy says abolishing Class 2 NICs for those with winnings over £12,570 is “a nice tax saving and an even better simplification – it’s one less tax to worry about.” But the Government must find a way to prevent low-income earners from unknowingly falling through the cracks.”
He added: “I think the Government will look to abolish Class 2 altogether – abolish it properly – and give those who voluntarily pay it another way to secure their entitlement.”
“There is already another way to do this, via Class 3 NICs. But this is more expensive, which is why the government has not yet completely abolished Class 2.
“Ideally, they will find a way for low earners to retain their entitlement without paying more.”
This is likely to mean “completely decoupling” the already vanishing link between NI and contributions, says Andy.
What should self-employed people do now?
Self-employed people have to wait a long time for benefits.
Class 2 and 4 NICs are paid as part of your self-assessment, so the changes form part of the tax calculation for your 2024/25 tax return.
Catherine Heinen, technical content writer at TaxAssist Accountants, says this means you won’t see the benefits of these cuts until January 31, 2026.
This is because self-assessment payments, including National Insurance, are due by 31 January following the end of the relevant tax year.
Catherine adds that while the cuts will put welcome money into the pockets of the self-employed, frozen tax bands mean many still face higher tax bills.
However, the new Social Security rates may have an impact on your financial situation. Therefore, you should prepare for the changes now or soon by calculating how they will affect your overall tax liability.
“You may want to review your planned income and expenses in light of the changes and adjust your budget accordingly,” says Nisha Prakash.
“You can use a tax calculator to estimate how much you will save with the new rates. If you anticipate a savings, you can plan how you can use it to reinvest in business growth, for example.”
If your profits are low, now may also be a good time to re-examine whether you need to make voluntary NICs to top up your state pension entitlement, particularly if there are gaps in your National Insurance records.
You can check your state pension forecast to see how much you could receive and when.
Final thoughts
Given inflationary pressures and higher interest rates, many companies and self-employed people are grateful for any help they can get from the government.
The cuts in social security over the course of 2024 will ensure this.
But exactly how they affect each employer and self-employed person depends on a variety of factors.
The changes will certainly pose a tough test for small employers to get their systems ready on time, and using a well-prepared payroll software provider will prove invaluable.
The quicker you can embed systems the better, as the Chancellor may have more “benefits/challenges” for small businesses in the future.
Editor’s Note: This article was first published in January 2024 and has been updated for relevance.