Workers to be just £2.68 a week better off with National Insurance rate cut as Hunt keeps 'stealth' tax
Chancellor Jeremy Hunt said he would cut the Class 1 National Insurance rate today during his Autumn Statement
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Hard-working taxpayers are set to be just £2.68 per week better off by Jeremy Hunt's National Insurance rate cut as the Chancellor has failed to scrap the six-year stealth tax, according to new analysis.
Prime Minister Rishi Sunak and Chancellor Jeremy Hunt have frozen income tax thresholds until 2028, which is forecast to raise £44.6billion by April 2029 via fiscal drag.
It means as wages rise, but the personal allowance and income tax thresholds do not, workers face being taxed on more of their income.
Shaun Moore, tax and financial planning expert at Quilter, said: "Hunt has given workers a minuscule nibble of carrot with his 2p cut to National Insurance contributions after they’ve been battered by stick recently.
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"The reality is workers are just £2.68 a week better off due to today’s tax ‘giveaway’ than they would have been had tax thresholds not been frozen."
Mr Moore welcomed the National Insurance cut, stating "more money in people's pockets thanks to tax cuts is no doubt a good thing", but warned employees are unlikely to feel the full effect of it.
According to calculations by Quilter, employees on an average salary of £32,963 will get an extra £8.60 per week due to the National Insurance cut, which is due to come in on January 6, 2024.
However, Mr Moore said that due to Prime Minister Rishi Sunak and Chancellor Jeremy Hunt enforcing a six-year freeze to tax thresholds, fiscal drag means workers will only benefit by around 50 per cent of this.
He continued: "If we assume the tax bands had increased by two per cent over the last four years, someone earning £34,963 should be a further £308.40 better off.
"Therefore, if you take this off today’s headline saving in tax it is actually only a saving of £139.46 over the year or a rather measly £2.68 a week.
“Hardly life enhancing even for those with budgets stretched to breaking point. The 2p cut for the 12% rate has the dual impact of making only a very minor difference to the amount of money people have while simultaneously risking the lower inflation figure we have been striving for."
The National Insurance rate reduction is worth up to £754 per annum, according to Nimesh Shah, CEO of leading tax and advisory firm Blick Rothenberg, who today warned that lower and middle earners will see little benefit.
Mr Shah said: “Lower earners do not benefit as much from the NIC reduction, and increasing the personal allowance in line with inflation would have been more helpful.
"For those earning over £150,000, the NIC reduction provides some relief against the cut to the additional rate threshold to £125,140 announced last year.”
The "squeezed middle" earners will continue to bear the brunt of high tax burdens, he warned, adding: “The frozen allowances and tax threshold continue to cause pain for middle earners – someone earning £60,000 is only £2,893 better off when compared to 2010/11, which is the equivalent of £200 per annum. When taking account of inflation during that period, that is a real terms hit of almost £17,000.”
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Chancellor Jeremy Hunt said the cut to the Class 1 National Insurance contributions rate would take effect from January 6, 2024
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Christine Cairns, tax partner at PwC, said the cut to National Insurance contributions was "significant" and "welcome".
However, she warned the introduction of the reduction three quarters of the way through the tax year, in January, was an "unusual step" warning that while it would be welcomed by those who benefit from the move, "it could cause an administrative headache for payroll operators".
Ms Cairns added: “Notwithstanding the cuts, significantly there were no increases to any tax thresholds, meaning the effects of fiscal drag will continue to bite, offsetting in part the savings achieved.
Commenting on fiscal drag, AJ Bell head of personal finance, Laura Suter, warned: "With little sign of that freeze ending early, workers are staring squarely down the barrel of yet more payslip pain in the years to come as wages rise but the Treasury takes a bigger cut too.
“Stealth taxes are everywhere, from frozen income tax thresholds, to a doubling in the tax take on cash savings interest, and an inheritance tax haul on-track for a record year."