It’s unlikely that you could have browsed the internet, watched the news or walked past a newspaper stand last week without hearing the exciting news: we are getting a tax cut.
From next month, the rate of National Insurance will be cut to eight per cent, down from ten per cent currently and 12 per cent this time last year.
For context, you pay National Insurance on anything you earn over £12,570, although the rate drops to two per cent for earnings above £50,270.
Jeremy Hunt, the chancellor of the exchequer, said that the cut made the system “simpler and fairer”. But what impact will it actually have on your bank balance?
In pounds and pence terms, it’s less headline-worthy. If you earn £25,000 a year, you will save about £20 a month thanks to the latest change to National Insurance contributions. This jumps to about £37 a month if you earn £35,000 and £63 a month if you earn £100,000.
Every little helps, but at a time when your food shop costs a quarter more than it did two years ago and higher mortgage rates have added more than £300 a month to a typical £200,000 loan, this tax cut is unlikely to make you feel much richer.
But the real thorn in the side of any tax cuts is “fiscal drag” — a fancy term for the fact that tax thresholds have been frozen since 2021 and, unless anything changes, will remain frozen until 2028.
This means that as prices increase and wages head skyward to match, a bigger proportion of your earnings go to tax and more and more people are dragged into higher tax thresholds.
You currently start paying income tax once you earn £12,570. If this threshold had increased with inflation since 2021, you could earn nearly £15,000 before paying tax. The higher-rate threshold, when you pay 40 per cent tax, would be nearly £60,000, rather than £50,270.
If the thresholds do remain frozen until 2028, the Office for Budget Responsibility estimates that there will be about four million extra taxpayers, three million extra higher-rate payers and another 400,000 workers paying top-rate tax.
All of this boils down to one thing: households will pay thousands more in tax than they would have done had thresholds been indexed in line with inflation.
With this in mind, is this tax cut all it's cut out to be?
According to the Institute of Fiscal Studies, only workers who earn between £26,000 and £60,000 will gain more from the reduced National Insurance rate than they lose from the threshold freeze this year.
Anyone else is likely to pay more due to the frozen thresholds, and the number of people in this camp will increase as wages continue to rise and more workers are dragged into paying more tax.
So while every little helps, it’s not the helping hand it’s made out to be if the other hand is stealthily taking the money back — right from underneath your nose.
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