Low earners will still pay £401 more in tax next year despite National Insurance rate cuts
Low earners will still have to pay hundreds of pounds more in tax next year
GETTY
Don't Miss
Most Read
Trending on GB News
Low earners are still set to pay hundreds of pounds more in tax next year despite National Insurance rate cuts, due to frozen income tax thresholds.
New calculations show savings from the reduced National Insurance rate will be wiped out due to the impact of the six-year freeze, known as fiscal drag.
The Government’s tax threshold freeze, in place until 2028, means the personal allowance will be held at £12,570, meaning workers will pay tax on more of their income as earnings rise.
Myron Jobson, senior personal finance analyst at interactive investor, says: “The cut to class National Insurance while maintaining the deep freeze in tax thresholds amounts to giving with one hand and taking away with the other.
Do you have a financial question you'd like experts to answer? Get in touch by emailing money@gbnews.uk.
WATCH NOW: Liam Halligan warns tax threshold freeze is equal to 5p or 6p tax increase
“Unfortunately for workers, the pendulum will increasingly swing against them over time as wages grow while tax thresholds remain unchanged.
“This sneaky tax grab is set to be a money spinner for the government, estimated to raise £42.9 billion by 2027-28 according to the OBR, costing the average worker £124 next tax year according to our calculations - despite reduction in NI.
“It is the ultimate stealth tax which is a difficult pill to swallow at a time when so many are still reeling from the cost-of-living budget squeeze.”
The Class 1 National Insurance rate cut from nine per cent to eight per cent, which will come into effect in January, would save a low earner on a £23,033 salary £209 in 2024/25, according to calculations by interactive investor.
However, the same earner is set to pay £610 extra tax due to the frozen tax thresholds. It means they will still have to pay £401 extra tax next financial year, after taking into account the National Insurance change.
For a middle earner on a £36,853 salary, the tax saving due to the National Insurance rate cut is £486 next tax year.
However, these workers face paying £610 in extra income tax due to fiscal drag – meaning they will still need to pay £124 more in tax next year after the National Insurance rate cut.
For someone on a salary of £57,582, the tax saving due to the National Insurance change would be £754.
The extra tax due to fiscal drag before the changes was £1,135, meaning these workers will still be £381 worse off.
Alice Guy, head of pensions and savings at interactive investor said fiscal drag is a “ruthless and silently effective tax policy” which leads to everyone “feeling a lot poorer over time”.
She added: “Frozen tax thresholds have a devasting impact on those earning just below a tax threshold, with low earners paying the biggest price.
LATEST DEVELOPMENTS:
WATCH NOW: Jeremy Hunt speaks to GB News after Autumn Statement
“Fiscal drag is painful for all of us, but high and middle earners will benefit slightly more from the national insurance cut, than low earners. However, everyone will still pay a lot more tax overall.”
Ms Guy suggested that those who can spare the cash might want to consider increasing pension contributions.
She said: “If you can afford it, then paying more into your pension is one simple way to reduce your personal tax burden.
“Some employers will allow you to pay into a workplace pension through salary sacrifice. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount as pension contributions.
“Basic-rate taxpayers get 20 per cent pension tax relief, turning a £80 contribution to £100. If you are a higher-rate taxpayer, you could reclaim an additional 20 per cent tax on your pension contributions, for a total of 40 per cent tax relief.”