- NI tax cut for workers starts tomorrow (6 January)
- Someone paid weekly could see a £14.50 boost to their payslip next Friday
- Tax cut worth up to £754 per person, over £1,500 a year for working couples
- Cut doesn’t compensate for income tax threshold freeze, which is costing some higher rate taxpayers £2,654 a year
By next Friday those paid weekly could have an extra £14.50 in their payslip, with cuts to National Insurance kicking in from 6 January.
Jeremy Hunt’s decision to cut National Insurance could save an employed working couple over £1,500 a year as he looks to put the ‘make work pay’ Tory motto into action.
The decision to slash the main rate of National Insurance from 12% down to 10% is estimated to cut taxes for 27 million working people and will save individuals hundreds of pounds over the course of the year.
Most people will see their take-home pay increase thanks to the change, although it won’t benefit everyone. Some part-time employees earning less than £242 a week – around £12,500 a year – won’t see a change in their payslip because they don’t pay any National Insurance. Likewise, those over state pension age don’t pay National Insurance, so those age 66 and over won’t see any change in their tax rate if they still work.
For the millions of workers that do benefit, the tax cut is worth up to £754 over the course of the year, slashing annual National Insurance bills from £4,524 to £3,770 in some cases.
Income tax freeze
Although National Insurance is being cut, income tax thresholds remain frozen.
Had income tax thresholds increased in line with inflation, the personal allowance would be over £15,000 from April, while the higher rate tax threshold – at which point workers start paying 40p for every £1 earned – would be nearly £61,000.
To illustrate the dramatic impact of ‘fiscal drag’ on income tax bills, the freeze is costing higher rate taxpayers as much as £2,654 a year. The impact is even more severe on the highest paid workers caught by the additional rate of tax.
Laura Suter, director of personal finance at AJ Bell, comments:
"The cut to National Insurance will be welcome news for people when they get their next paycheque – with most workers seeing a slight increase in their take-home pay. Sadly the difference for most is not enough to get too excited about – or even to compensate for recent rising prices – but the timing will give a small boost to people’s budgets just as the bills from Christmas land.
“Another perk is that employed people don’t have to do anything to claim this extra boost – their company’s payroll department will have made the change for them, meaning they automatically get the increase in their take-home pay. But employees should take an eagle eye to their next payslip to make sure the change has been made.
“Some people may be wondering why they’ve read that taxes are going up at the same time as they’re enjoying a drop in the rate of National Insurance. That’s because the cut to National Insurance is not enough to compensate for the government’s decision to freeze income tax thresholds. The big brother to National Insurance, income tax is charged on incomes at a much higher rate and, rather than being cut, it has increased by stealth in recent years.
“This, coupled with sky-high inflation in recent years, means that many people are still looking down the barrel of a real terms pay cut over the past few years, even with this National Insurance change today. The Government is banking on some good news headlines coming out of this change – but in reality they are giving with one hand and taking far more with the other. All eyes will be on the Spring Budget to see whether the deep freeze on income taxes will be lifted – a savvy move in an election year – or whether Jeremy Hunt finds there isn’t enough money in his piggy bank for such an expensive, crowd-pleasing move.”
