Earning less than £29k? Your NI cut will be wiped out by stealth taxes
The main rate of national insurance was cut from 12% to 10% on Saturday.
Chancellor Jeremy Hunt said the cut means a typical family with two earners will be nearly £1,000 better off a year.
This is based on the fact that someone earning a salary of £35,000 in 2024/25 will pay £450 less in national insurance.
If you consider the national insurance cut in isolation, this is true. But the government has also frozen tax thresholds. When you take this into account, it lowers the tax cut for an average earner to £130 a year.
Figures from the Institute for Fiscal Studies show that people earning up to around £50,000 will save a little bit more than this in 2024/25 as a result of the national insurance cut, but those earning less than £29,000 will almost all lose out.
In fact, for both the highest and lowest earners, the tax increase from freezing thresholds from 2021 to 2024 is much larger than the national insurance cut.
Why do frozen tax thresholds mean I pay more tax?
If inflation is 6.7% and wages go up 6.7% but tax thresholds don’t go up 6.7%, you end up paying tax on more of your wage. And the effect is worse for those dragged into a higher tax band.
The government stopped raising most personal tax thresholds in line with inflation in April 2021, with the freeze set to remain in place until 2028.
The revenue raised from freezing thresholds this April alone, rather than uprating them by 6.7% in line with the usual inflation measure, is greater than the annual cost of cutting the national insurance rate.
It means four million more earning over £12,570 will be dragged into paying income tax, three million more will pay the higher rate, and 400,000 will pay the top rate.
A qualified journalist for over 15 years with a background in financial services. Rebecca is Money Wellness’s consumer champion, helping you improve your financial wellbeing by providing information on everything from income maximisation to budgeting and saving tips.
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