I work as a technical consultant in an air freshener company and earn £30,000 a year. I am single, aged 24 and live at home with my parents. 

I’m delighted the government has cut my national insurance contributions as it means I may have a bit more money in my pay packet this month. But before I go spend it, should I be saving it and if so what should I save it in? 

I have joined my employer’s pension scheme, and I set up a lifetime ISA last year.

Jacob

Rachel Vahey, AJ Bell Head of Public Policy, says:

Successive Chancellors have tried to win political favour by including big announcements in their Budget or Autumn Statement speeches – often referred to as ‘pulling a rabbit out of the hat’.

Last November, Jeremy Hunt used his speech to cut national insurance contribution rates for both employees and the self-employed, giving a welcome boost to workers’ pay packets.

From 6 January, the national insurance rate for employed people was cut from 12% to 10%, in a move that is estimated to cut taxes for 27 million working people.

For someone like you, an employed person on a £30,000 salary, this will save around £350 a year, while anyone earning more than the £50,270 threshold will save the maximum of £754 a year.

The Government will also cut rates for self-employed workers, but that won’t come into effect until 6th April this year. At that point the Class 2 band of National Insurance will be abolished, saving self-employed workers £179.40 a year at current rates. And the rate for Class 4 contributions will be cut from the current 9% to 8%.

While £350 more a year isn’t to be sniffed at, it isn’t a fortune and could easily disappear meeting the rising cost of living such as on increasing food prices or energy costs.

But, if you’re able to do so, you could use the extra money in your pay packet to double down on those New Year’s resolutions to get your finances sorted. If you haven’t made any resolutions yet, now is a good time.

The first call is to pay down any debt. The next is to build up a buffer fund to help with any financial emergencies – financial advisers usually recommend holding between three- and six-months’ worth of salary. But if these two aims are ticked off then the extra money could be saved. If left alone, compound interest can work its magic to turn that small amount into a reasonably-sized sum.

For example, by keeping the same take home pay, an employed person with a £30,000 income could build up another £3,100 over the next six years by saving £350 in a Lifetime ISA (assuming that annual amount increases by 2% each year, investment returns are 4% after charges, and they are within the Lifetime ISA subscription maximum of £4,000 a year so can receive their government 25% bonus).

That could help with a future first house purchase. But if not, the money can stay in the Lifetime ISA and be taken out in full from age 60. Take it out earlier and there will be penalty of 25%.

If you save into a different type of ISA, you will be able to get your money out when you want, with no penalty, but you won’t get the benefit of a government bonus on the amount you invest.

Alternatively, the money could be saved into a pension where it will get a boost from basic rate tax relief generating an extra £16,000 pension pot over 20 years (again assuming it increases each year by 2% and the investment return is 4% after charges).

It’s always worth checking with employers and your pension scheme that you can pay this extra amount into your pension. Depending on the pension scheme, it’s even possible that if you pay a bit more your employer might do so as well.

You can’t get hold of your pension money until age 55 (increasing to age 57 by 2028). You will be able to take 25% of it as a tax-free lump sum, and the rest will be taxed as income.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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