Harness this tax cut to add thousands in retirement

A cut to National Insurance (NI) rates announced last year is now in force, meaning there’ll be a little more left in employees’ pay packets this month. 

The main rate of primary Class 1 National Insurance contributions for employees was lowered from 12% to 10% on 6 January this year. In April, there will also be cuts to NI rates for the self-employed.  

The cuts were announced with fanfare in the Government’s Autumn Statement in November. It was only a partial victory for workers. Other changes that the Government has made - notably a freeze on NI and income tax rates until 2028 - mean that employees are likely to pay more tax on income in the years ahead than they would if tax bands were to rise with inflation.¹ 

Nonetheless - most pay packets now will see a cash boost from the cut to NI. And by acting to lock in that extra cash and put it to use via investments, employees could add thousands - even tens of thousands - of pounds to their retirement funds, although investment returns are not guaranteed.   

NI rate cut - what is it worth?

Despite its name, National Insurance for employees works more like a tax on income. NI applies at different rates on different levels of earnings - much as Income Tax does. Most people working for an employer pay Category A NI contributions. There are some instances when different rates apply, notably if you are over your State Pension age, and you can view those here.   

For Category A contributions, no NI is charged on earnings up to £1,048 a month. Earnings between £1,048.01 and £4,189 a month are charged at 10% - the new lower rate - and then earnings above £4,189 attract 2% NI. 

The cut in the rate from 12% to 10% is therefore worth £754 a year to anyone earning £50,270 or more a year and paying Category A contributions. It is worth less if you earn less than that. For example, those on £35,000 save £448.60 a year. Those on £20,000 save £148.60.² 

Putting that extra cash to work - and getting another boost from the taxman

By putting any savings made from the NI cut towards long-term savings employees can improve their future financial security. All they need to do is to divert the increase in their pay packet from December to January into investments. 

And if they do this via a pension, the boost can be even greater. Here’s what we mean. 

For someone earning £50,270 a year or more, the NI cut will boost their take-home pay by £62.83³ a month. By paying this extra amount into a pension they will also benefit from Pension Tax relief. Tax relief at the basic rate of tax is added automatically, meaning the total paid into a pension rises to £78.54.⁴  

Below you can see what this extra has the potential to turn into if invested over many years. This is based on a 5% investment return, which is not guaranteed and after all fees. The lines show the totals achieved, with contributions starting from ages 25, 35, 45 and 55 until age 65.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.