UK Government Tax Cuts Result in Continued Worker Hardship.
The UK government‘s recent announcement of a National Insurance tax cut for workers offers relief amid a challenging economic landscape.
However, the touted benefits of this reduction seem overshadowed by the lasting impact of frozen personal tax thresholds, leading to a deeper analysis of its actual implications.
Finance Minister Jeremy Hunt unveiled a significant decrease in National Insurance tax, aiming to alleviate the burden on workers. This tax funds social security benefits, including the state pension, and the reduction, from 12% to 10%, was projected to benefit 27 million individuals, saving an average earner around £450 annually.
Despite its £10 billion cost to the government, this move was presented as the “largest ever tax cut for workers” by the Conservative party.
Nonetheless, this tax cut does not shield taxpayers from the broader effects of frozen tax thresholds, known as “fiscal drag,” wherein nominal wage increases push individuals into higher tax brackets.
The Office for Budget Responsibility (OBR) highlighted that ongoing freezes and reductions in personal tax thresholds have resulted in a considerable increase in revenue for the Treasury. By 2028-29, these freezes are projected to raise a staggering £44.6 billion, significantly impacting taxpayers.
In 2021, then-Finance Minister Rishi Sunak froze the personal allowance (PA) at £12,750 and the higher-rate threshold (HRT) at £50,270 until April 2026. This freeze was extended to 2028 by Hunt in the 2022 Autumn Statement.
Furthermore, the upper earnings limit for NI contributions was frozen, and the additional rate threshold was lowered from £150,000 to £125,140 starting April 2023.
The repercussions of freezing tax thresholds rather than adjusting them in line with inflation have led to millions of individuals being pushed into higher tax brackets or brought into the tax system.
The OBR estimates that by 2028-29, nearly 4 million more people will pay income tax, 3 million will move to the higher rate, and 400,000 will fall into the additional rate category.
The OBR’s analysis underscores that while the NI cut by Hunt may mitigate the impact of primary threshold freezes, it only alleviates approximately £180 million, significantly less than the £44.6 billion projected from frozen entries.
These freezes represent the largest contributor to the increasing tax burden, responsible for nearly a third of the 4.5% GDP increase in taxes from 2019-20 to 2028-29.
Despite the 2p NI cut, experts like Torsten Bell, chief executive of the Resolution Foundation, argue that most of the population will not benefit. Only those earning between £11,000 and £13,000 and £42,000 to £52,000 annually are likely to experience any positive impact.
While the National Insurance tax cut might seem like a step towards easing the financial strain on workers, the broader ramifications of frozen tax thresholds paint a different picture.
The significant revenue accrued through these freezes raises questions about the actual relief offered to taxpayers. It highlights the complexities in assessing the true impact of tax policies on individuals across different income brackets.
