Low earners will still pay £401 more in tax next year despite National Insurance rate cuts

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.

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“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.

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“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.”