In his latest Spring Statement, Chancellor Rishi Sunak announced upcoming changes for income tax and National Insurance contributions (NICs).
The NICs threshold will be brought up to the same level as the income tax allowance (£12,570), which the Government said would save the average worker £330 a year.
Self-employed people who earn between the small profits threshold (£6,725) and the lower profits limit will not pay Class 2 NICs but will still build up National Insurance credits, to make sure they also benefit.
The Chancellor also announced that income tax would be cut from 20% to 19% from April 2024.
This cut will affect 30 million workers, pensioners and savers alike, with the average taxpayer saving around £175, according to the Treasury.
Do the changes benefit everyone?
With the 1.25% uplift in NICs and following health and social care levy here to stay, there have been disputes over how better off people will be.
Torsten Bell, chief executive of the Resolution Foundation, said:
"Middle and higher income households will gain most from the rise in the National Insurance threshold, but only £1 in every £3 of additional support announced today will go to the bottom half of the income distribution.
"Looking further ahead, the promise to cut income tax only benefits those earning over £49,000 once the four-year freeze to the Personal Allowance is taken into account."
In his Spring Statement, Sunak said 70% of workers will be paying less in NICs because of the threshold changes, despite the NICs hike and health and social care levy.
Paul Johnson, director of the Institute for Financial Studies (IFS), seemed to disagree when taking tax threshold freezes into account, saying:
"The freezing of the income tax personal allowance and higher rate threshold turn out to be much bigger tax rises than first intended.
"As a result, almost all workers will be paying more tax on their earnings in 2025 than they would have been paying without this parliament's reforms to income tax and NICs, despite the tax cutting measures announced today."
In the Spring Budget 2021, Sunak announced income tax thresholds would be frozen until 2025/26 to "fix the public finances".
Tax cuts: temporary or permanent?
The income tax cut is forecast to cost the Treasury around £26.345bn over the next five years.
The Treasury hopes to cover lost tax receipts from three main areas, as outlined in the costing documents:
- HMRC compliance (tax enquiries): £3.156bn
- DWP compliance (benefit fraud and error): £2.24bn
- Student loans (frozen thresholds and increased interest): £35.215bn
The cut in the basic rate of income tax will be coming into effect just a matter of weeks before a general election, which is formally set for 2 May 2024.
Some believe that even with the proposed cuts to tax, the rising costs of inflation will mean that people could potentially be worse off.
Paul Johnson added:
"There are two paradoxes at the heart of today's statement. The Chancellor has managed to announce tax cuts without reducing the planned tax take from previous plans.
"The cuts to income tax and National Insurance are effectively paid for by increasing revenues as a result of fiscal drag. The freezing of the income tax personal allowance and higher rate threshold turn out to be much bigger tax rises than first intended."
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