Millions to get pay rise worth up to £754 a year from TODAY – and you can be £10,000s better off
MILLIONS are getting a pay rise from today – and it could see them tens of thousands of pounds better off in the long term.
The Government slashed the main National Insurance (NI) rate earlier this month.
The 12% rate of employee NI, also known as Class 1 NICs, was cut to 10% on January 6, but most households will start noticing it today as that’s when most companies pay their staff.
Twenty seven millions workers who pay the tax will see their income boosted in bank accounts and payslips.
The average worker on £35,400 a year will save £450 while some could see their pay boosted by as much as £754.
If you earn under £242 a week, which works out as £12,570 a year, you won’t see a difference in your pay as you won’t pay NI.
Those over the state pension age, currently 66, also won’t see a change from today.
Anyone who will see a boost in their earnings following the NI cut could end up tens of thousands of pounds better off in the long-term too.
That’s if you put the extra money into a pension pot or use it to pay off a chunk of your mortgage.
Using your extra earnings for a pension
Basic rate taxpayers are set to see their incomes rise by up to £62.83 from today thanks to the cut to NICs.
But rather than keeping hold of the cash now, you could add it to a workplace pension.
Doing this every month would see its value increase to £75.39 as pension savings benefit from a Government-paid tax relief of 20%.
Remember too, that money put into a pension pot can grow in value, meaning you get added cash on top of what you put in.
Of course, pensions can also shrink in size due to external factors such as a poor economic backdrop or new laws.
Overall, how much you end up boosting your pension by adding extra money from today’s cut depends on how long you have left to work before retiring.
The younger you are when you start, the more you will build up when you start claiming.
A 25-year-old could have £134,389 extra, according to figures by wealth manager Evelyn Partners.
Meanwhile, a 65-year-old with just two years until retirement could enjoy a £2,064 boost.
These figures assume your savings are growing by 5% each year.
Use your earnings to slash your mortgage bill
You could use the extra cash earned today to repay your mortgage earlier.
Data from bank Santander suggests a worker on a £30,000 annual salary putting their full NI saving of £29 a month towards their 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 the £29 a month from now would mean being mortgage-free more than a year earlier than if you had not made the change.
Santander also said you can overpay as little as £10 a month and still reduce your overall mortgage bill.
Doing this would reduce the figure by £2,500 and slashed four months off a mortgage term, it said.
To unlock the total savings you would need to keep up extra repayments for the term of the mortgage, even if NIC rates went up or down.
The calculation is also based on the same mortgage rate for the duration of the term.
Before overpaying on your mortgage, make sure to check you won’t be hit with any early payment fees.
What is National Insurance?
National Insurance is a tax on your earnings which is used to fund state benefits.
This includes the state pension, statutory sick pay, maternity leave and unemployment benefits.
If you are a UK national, you should receive an NI number and card automatically before you turn 16.
This number allows the Government to track your earnings and apply the right amount of tax.
Who pays National Insurance?
You pay National Insurance if you’re 16 or over and either:
- an employee earning above £242 a week
- self-employed and making a profit of £6,725 or more a year
If you’re employed, NICs are taken out of your monthly salary, but self-employed people have to pay it through self-assessment.
You can see your contributions if you’re employed by looking at your pay slip.
Once you reach state pension age, you don’t need to pay it.
There are different types of National Insurance – known as “classes” -and the type you pay depends on your employment status and how much you earn, and whether you have any gaps in your National Insurance record.
What are the current NIC thresholds and how much do I pay?
The threshold for National Insurance payments is currently £12,570 a year for employed workers and £6,725 for self-employed people.
A change in April 2022 saw millions of workers paying 1.25% more NI, but that hike was reversed from November of the same year, saving workers £330 a year on average.
But 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 any earnings between £242 and £967 a week.
Plus you have to pay 2% on anything you earn over £967 a week – or £4,189 per month.
Those earning less than these amounts do not have to pay any National Insurance.
Your pay will depend on how much you earn, as it’s a percentage of earnings between these amounts.
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