Further 2p cut in employee National Insurance contributions takes effect

A further 2p reduction in employee National Insurance contributions was announced in March and came into effect in April, according to UK Finance's Household Finance Review for the first quarter of 2024¹. The cut followed a 2p reduction announced last autumn¹.

For basic rate taxpayers, the combined effect of the two cuts equates to an additional £606 annual increase in take-home pay, UK Finance said¹. The review was published in June 2024¹.

The reduction in National Insurance applies to employee contributions collected through PAYE. The review does not set out the rates by nation or the treatment of other National Insurance classes, and no further detail on the measure has been reported in the document¹.

UK Finance said the spring budget measures would "provide a further boost to disposable incomes"¹. It also noted that the substantial 9.8 per cent rise in the national minimum wage came into effect in April, and that solid wage growth is being closely watched by monetary policy makers¹.

At its May meeting, the Monetary Policy Committee voted 6-2 to hold Bank Rate at 5.25 per cent¹. UK Finance said markets were expecting the first reduction later in the summer¹.

Why it matters for households

Employees paying basic rate tax saw the second of two 2p cuts to their National Insurance contributions take effect from April 2024, worth £606 a year in take-home pay when the two cuts are combined¹. The change affects pay packets rather than gross pay, so it shows up in the amount received each pay period.

The review places the cut alongside other pressures and supports. It said pressure on household finances will continue easing over the course of the year, but that consumer sentiment and card spending remained relatively muted in the first quarter¹. CPI fell back to 2.3 per cent in April, less than the Bank of England and other forecasters had expected, while services inflation fell only to 5.9 per cent and core inflation remained elevated at 3.9 per cent¹.

UK Finance also reported that the decumulation of savings to cover monthly budget shortfalls seen through last year had come to a halt, and that attractive rates of return led to an increase in deposits in notice accounts and cash ISAs for those able to save¹. Mortgage arrears rose for the sixth consecutive quarter from a very low base, though the rate of increase slowed, and further modest increases were expected through the year¹.

The review does not state how the cut interacts with National Insurance credits or with the position of the self-employed, and no such detail has been reported¹.

What happens next

UK Finance said a general election in July, earlier than many had expected, may bring a change in policy priorities later this year, and that any new measures affecting households or the housing market are unlikely to be felt until next year¹. It said there was an outside chance a majority on the Monetary Policy Committee could be swayed for a rate cut in June, but that markets were then expecting the first reduction later in the summer¹. The Bank upgraded its growth forecast in its May Monetary Policy Report, expecting growth of 0.5 per cent this year and one per cent in 2025¹.