Due to static income tax thresholds, low-income workers will continue to pay hundreds of pounds more in tax next year, despite National Insurance rate decreases.
New calculations reveal that the savings from the lower National Insurance rate will be offset by the fiscal drag of the six-year freeze.
The Government’s tax threshold freeze, in effect until 2028, means that the personal allowance will remain at £12,570, implying that workers would pay more tax as their incomes climb.
“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,” argues Myron Jobson, senior personal financial analyst at interactive investor.
“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.”
According to interactive investor calculations, the Class 1 National Insurance rate reduction from 9% to 8%, which takes effect in January, would save a low income on a £23,033 salary £209 in 2024/25.
Still, due to the static tax thresholds, the same earner will have to pay an additional £610 tax.
After accounting for the National Insurance adjustment, they will still have to pay £401 higher tax next fiscal year.
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.