UK Government’s Tax Cuts Fail to Improve Worker Finances.
UK Finance Minister Jeremy Hunt recently announced a substantial reduction in National Insurance tax to alleviate the strain on workers facing a cost-of-living crisis.
This tax, which impacts both worker income and employer profits, funds state social security benefits like the pension.
The move, cutting National Insurance for workers from 12% to 10%, was hailed as benefiting 27 million individuals, with someone earning the national average of £35,000 per year set to save over £450.
Despite its billing as the “largest ever tax cut for workers,” its impact is muffled by frozen personal tax thresholds causing what’s known as “fiscal drag.”
While the Conservative government seeks to court voters before the upcoming general election, this tax cut doesn’t shield taxpayers from frozen tax thresholds. These thresholds, stagnant as nominal wages rise, push more income into higher tax brackets, affecting many individuals
The Office for Budget Responsibility highlighted the substantial impact of these freezes, estimating a whopping £44.6 billion in revenue for the Treasury by 2028-29 due to these policies.
This freeze on tax thresholds was initially announced by Rishi Sunak in 2021, freezing the personal allowance and higher-rate income tax thresholds until 2026.
Hunt extended this freeze further to 2028 in his recent statement. Alongside this freeze, Hunt also froze the upper earnings limit for NI contributions and lowered the additional rate threshold from £150,000 to £125,140 starting April 2023.
The consequence of these frozen thresholds, instead of adjusting them with inflation, is significant. As nominal wages rise, more individuals are pushed into higher tax brackets or into the tax system, despite previously being below the income level requiring taxation.
The OBR projects that by 2028-29, nearly 4 million more individuals will be paying income tax, 3 million will fall into the higher rate, and 400,000 more will join the additional rate.
These threshold freezes are anticipated to generate a substantial £44.6 billion for the Treasury by 2029, accounting for 1.4% of the GDP, significantly overshadowing the modest impact of Hunt’s NI cut, estimated to reduce the primary threshold freeze by only around £180 million.
The OBR further emphasized that frozen thresholds represent the largest contributor to the rising overall tax burden, responsible for almost a third of the 4.5% GDP increase in taxes from 2019-20 to 2028-29.
Despite the 2p cut to NI, Torsten Bell, the chief executive of the Resolution Foundation, pointed out that the majority of the population would still be worse off. The benefits would predominantly favor individuals earning between £11,000 to £13,000 annually and those within the £42,000 to £52,000 bracket.
While the government’s NI tax cut might appear as a significant relief for workers, the tax thresholding freeze considerably undermines its impact. The continuous freezing of these thresholds significantly contributes to a larger tax burden on individuals, outweighing the relief offered by the NI cut for the majority of taxpayers.
