Why you should use National Insurance cut to boost your pension: Jillian Thomas

Millions of British employees nationwide will have noticed a pay rise in their monthly payslip in the last couple of months following an initial cut to National Insurance contributions that came into effect in January.

Chancellor Jeremy Hunt outlined the first 2p cut in November and has doubled down on the move this week with further 2p cut coming from April.

From the perspective of a financial adviser, it’s my residing hope that these changes will spur those employees to consider how their state - and private pensions - will define their future financial lives.

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Chancellor of the Exchequer, Jeremy Hunt, leaves 11 Downing Street with his ministerial box before delivering his Budget (Photo by Stefan Rousseau - WPA Pool/Getty Images)Chancellor of the Exchequer, Jeremy Hunt, leaves 11 Downing Street with his ministerial box before delivering his Budget (Photo by Stefan Rousseau - WPA Pool/Getty Images)
Chancellor of the Exchequer, Jeremy Hunt, leaves 11 Downing Street with his ministerial box before delivering his Budget (Photo by Stefan Rousseau - WPA Pool/Getty Images)

First, let's place everything that's happened recently in context.

The government had announced that 'record national insurance cuts' would arrive on January 6 this year when the National Insurance Contributions (Reduction in Rates) Bill became law.

Put simply, National Insurance (NI) is a tax paid by those under state pension age to fund state pension benefits and the amount of NI you pay depends on your employment status and how much you earn.

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It was reduced on January 6 as a direct result of a pledge made by the Mr Hunt in last year’s Autumn Statement.

Speaking at the time, Mr Hunt made it quite clear that he wanted British residents to see the "benefit" in their salaries from the start of 2024.

Those employees paying 12 per cent on earnings between £12,570 and £50,270 - also known as Class 1 NICs - are now paying 10 per cent, representing a 2 per cent cut. From April, this will drop to eight per cent.

The dual cuts benefits 27 million workers nationwide with the government estimating a £900 average saving.

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The self-employed will also be getting tax cuts, with their rate dropping to six per cent.

The increased take-home pay that many of these ‘payroll’ employees are now witnessing in their paychecks could undoubtedly help alleviate some of the well-documented price increases linked to the ongoing cost of living crisis.

Given the steep price increases that we’ve all witnessed over the past two years, this is undoubtedly to be welcomed.

Nonetheless, it’s my residing hope that the current changes to NI will galvanise workers in another way.

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I hope that they will all take stock of their pensions – both state and private – to ensure that they are planning for the most financially secure future.

Put simply, it's essential to take personal responsibility for the retirement you want.

By understanding and checking your pensions on a regular basis, you’ll have the peace of mind that comes from knowing you’re on track to achieve future financial security.

As a starter for 10, it couldn’t be easier to check your state pension forecast on the gov.uk website.

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Throughout my career, I’ve seen on many occasions that rules and regulations concerning pensions change with different governments.

For example, the limit on pensions input rose from £40,000 to £60,000 just last year - although there are rules where this allowance can be tapered down due to the level of remuneration to be received.

While these changes are primarily relevant to high-net-worth individuals, they highlight the importance of considering how much you feel you can realistically afford to put into your private pension.

It's essential to stay fully informed about all the latest rules, so you can respond accordingly and make financial decisions that reflect both the current situation and what's right for you.

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And while we're on the topic this is also a great time to ensure that you're making the most of your employer pension contributions.

Many employers will commit to matching the amount of money you put into a workplace pension.

If that’s the case for you, it might be worth reviewing this scheme to work out if you can afford to contribute a little bit more than you have been doing, so your employer has to contribute more too, using the saving in NI to increase the amount you're saving.

The ideal retirement scenario is to be in a position where you can enjoy one long holiday with your life filled with those hobbies, activities and pursuits that bring you joy... not the longest period of unemployment.

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So, check all your pension details at the earliest opportunity to ensure that you’re on track to achieve this outcome – and don’t be afraid to make fully-informed changes if they’re required.

Jillian Thomas is founder and divisional director of Future Life Wealth Management, based in Renishaw.​​​​​​​​​​​​​​​​​​​​​​​​

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