What the Tory manifesto National Insurance tax cut means for self-employed people

National Insurance
National Insurance

The Conservatives have pledged to abolish the main rate of National Insurance paid by the self-employed and to cut NI rates for the third time in the space of a year for employees, saving the average worker £449 a year.

Rishi Sunak’s bold proposal, which will be to the benefit of 27 million households, comes as his party desperately tries to close the wide gap in the polls to Labour.

The Tory party manifesto pledges to entirely abandon the mandatory “Class 4” NI contributions made by the self-employed.

The commitment will be followed through before the end of the next Parliament in 2029.

The Tory manifesto states: “To recognise the unique contribution of these risk-takers and entrepreneurs to our economy and the insecurity they face without the rights and protections that employees enjoy, we will abolish it entirely by the end of the next Parliament.”

Tuesday’s pledge comes after the employee rate of NI was reduced from 12pc to 10pc last autumn and then to 8pc in spring. The next plan cut would mean it falls to 6pc.

The commitment is further evidence that the Conservatives are attempting to make tax a clear dividing line with Labour during the election campaign, promising to lower levies while accusing the opposition of planning tax rises.

Labour’s shadow health secretary Wes Streeting said Mr Sunak is “taking people for fools” by pledging further NI reductions, stressing that the prime minister “should level with people that the money simply isn’t there”.

National Insurance to be abolished for the self-employed

Currently, the self-employed pay 6pc on profits between £12,570 and £50,270. They also pay 2pc on profits above £50,270.

The Conservatives have today pledged to abolish the “main rate” of Class 4 contributions before the end of the next Parliament, in a commitment to “support the self-employed”. That would abolish the 6pc rate, but keep the 2pc rate paid by those making higher profits.

How many people will benefit?

There are 4.25 million self-employed workers in the UK, according to official statistics. The Prime Minister said nine in 10 of them would be exempt entirely from NI.

​How much will the policy cost?

​The Conservatives had already announced the abolition of Class 2 NI contributions, which came into effect in April 2024. In 2023-24, the self-employed paid £4.8bn in Class 2 and 4 NICs.

How much will self-employed workers save?

In the current tax year, a self-employed person making £50,000 of profits would pay £2,245.80 in​ Class 4 NI. They would save this amount if​ the main rate of NI was abolished as per the Prime Minister’s plan.​ Someone making £100,000 of profits ​would still pay some NI, because the higher, 2pc, rate of Class 4 NI would not be abolished. This person would make a saving of £2,262 a year if the main rate were abolished and they would still pay £994,60.

... but will the freezing of income tax allowance wipe out the gains from an NI cut?

In short, no.

Rishi Sunak and Jeremy Hunt’s tenures as Chancellor and Prime Ministers have been defined by the “stealth tax” raid on workers. This trick saw the personal allowance and higher-rate tax thresholds frozen at a time when wages rose sharply, meaning income tax receipts soared. Telegraph Money has previously revealed the cost on ordinary families of this effective tax grab.

But wealth manager Quilter has calculated that even when taking frozen income tax thresholds into account, a self-employed person currently earning £50,000 will benefit from the scrapping of Class 4 NI.

Assuming their income grew 5pc a year over the next five years, a £50,000-a-year earner would quickly fall into the clutches of the higher-rate, 40pc, income tax bracket. Due to the frozen thresholds of both the personal allowance and higher-rate tax, they will have to pay an extra £3,872 in income tax over the duration of the next five years.

It is not clear yet exactly how quickly the Conservatives would scrap Class 4 NI. The party’s manifesto only committed to fully abolishing it by the end of the next Parliament.

Assuming Class 4 NI contributions were tapered off by 1 percentage point each year, by the 2029-30 tax year, the same person would have saved £6,032 in NI. This works out as a £2,160 net saving when comparing NI reductions with the cost of frozen income tax bands.

If instead Class 4 NI was abolished in one fell swoop full next April, the NI saving in the five-year time period would be £11,310. However, experts reckon this scenario is unlikely and the reduction would instead by staggered.

How much will a 2 percentage point cut save employees?

Employed workers will still pay NI under the Tories’ plan, but the main rate has been cut by a further two percentage points.

A worker on the average £35,000 salary will save £449 in tax a year thanks to the planned NI reduction, according to wealth manager Quilter.

Someone earning £50,000 will be £749 better off, while lower earners on £20,000 will save £149.

Shaun Moore, of Quilter, said: “This may be a case of too little, too late.

“The reality is that many people are looking at the difficulties that public services are facing at the moment and wondering how such a tax cut like this will impact the NHS, schooling and other state support.”

Tax experts pointed out that, taken together with the deep freeze on income tax and other thresholds, many people will still be worse off.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “A National Insurance cut would offer a tax break to hard-pressed workers, but they would still be squeezed horribly by the frozen tax thresholds.

“It means that as people’s pay rises, they automatically pay more income tax, and risk being pushed into a higher tax bracket. Already 2.1 million people have been dragged into paying income tax because of it.

“Another NI cut would bring down the rate of tax they pay, but doesn’t unwind the fact they’re paying this tax in the first place.”

What is National Insurance?

National Insurance is paid by workers who are 16 or over, earning at least £242 a week and under state pension age.

NI receipts are used to fund benefits, including the state pension, as well as maternity allowance, bereavement support payment and new-style jobseeker’s allowance.

Similar to how income tax is levied, the money is taken from your payslip through PAYE if you are employed, or via self-assessment if you work for yourself or need to declare additional forms of income.

The amount you pay depends on how much you earn; the type of contribution – known as the “class” – you pay depends on whether you work for an employer or for yourself.

Under “Class 1” National Insurance, you pay 8pc on earnings between £242 and £967 a week, and 2pc on earnings over £967 a week.

How long do you pay National Insurance for?

You continue to pay contributions until you reach state pension age (currently 66 years old).

After this, if you work for an employer, you no longer have to make payments even if you still have a job.

How does National Insurance impact your pension?

The amount of state pension you receive depends on a few factors, including when you reach or reached state pension age and, chiefly, how many full years of National Insurance contributions (NICs) you’ve made by the time you reach it.

To qualify for the new state pension (men born after April 6 1951 and women born on or after April 6 1953) , you’ll need at least 10 years of NICs.

To get the full state pension, you’ll need the full amount which is 35 years. So, racking up enough NICs over your working life can be the difference between getting an extra £10,000 a year in government payments when you reach retirement.

Although most people work for at least 35 years, many don’t. For example, you might have been a low earner who did not pay NICs, out of work and not claiming benefits, self-employed with low profits, working part-time or living abroad.

Any of these situations can create gaps in your National Insurance record – and could mean you get a lower state pension as a result.

If you’re in this situation, you do have options to fill these gaps, and one of those is buying voluntary NICs.

Will National Insurance be abolished?

The Tories have now pledged to scrap NI contributions for the self-employed, but Chancellor Jeremy Hunt previously revealed his ambition to abolish National Insurance entirely.

He vowed to “end this unfairness” of “double taxation”. However, plans to abandon the levy in the coming years are yet to be mapped out.

Treasury estimates suggest that stopping all workers paying NI would cost around £50bn, and potentially benefit the average worker by around £2,000 a year.

Why is your National Insurance number important?

You’ll usually be issued with a NI number just before you turn 16. This is made up of two letters, six numbers and a final letter – and is unique to you.

All sorts of people and bodies may need to know your NI number, such as HMRC, employers and pension providers, your local council, student finance agencies, banks, building societies and other financial services.