UK Finance Minister, Jeremy Hunt, has announced a cut to National Insurance tax on workers that is expected to benefit 27 million people. The tax will be reduced from 12% to 10%, resulting in potential savings of over £450 for someone on the national average yearly salary of £35,000. However, the positive impact of this cut may be overshadowed by existing freezes on personal tax thresholds.
Despite the potential benefits for millions of workers, the reduction in National Insurance tax is estimated to cost the government approximately £10 billion. Furthermore, the freezes on personal tax thresholds are expected to push more individuals into higher tax brackets as nominal wages rise. The Office for Budget Responsibility (OBR) predicts that these freezes and reductions in personal tax thresholds will raise a combined total of £44.6 billion in 2028-29 alone.
Unfortunately, the cuts announced by Hunt will only slightly reduce the impact of the freeze on personal tax thresholds, amounting to around £180 million. In fact, the frozen thresholds are projected to increase the overall tax burden by nearly a third of the 4.5% tax hike observed between 2019-20 and 2028-29. As a result, the majority of the country is anticipated to be worse off, with only those earning around £11,000 to £13,000 and £42,000 to £52,000 benefiting from the tax changes.
The state of public finances in the UK has not experienced significant improvement, and the growth outlook remains weak. Additionally, experts argue that younger workers will likely bear the burden of these tax changes. While the cut to National Insurance may put some extra money into workers’ pockets, it is unlikely to prevent this from becoming the biggest tax-raising parliament in modern times.
As the reduction in National Insurance tax is announced, it is crucial to consider the broader implications of existing freezes on personal tax thresholds. Although millions of workers may benefit from these tax changes, the overall impact is overshadowed by the burden placed on individuals as freeze-induced tax hikes push them into higher brackets. With the UK’s public finances showing little signs of significant improvement and a tepid growth outlook, it is clear that the younger generation will bear the brunt of these tax adjustments. While the cut to National Insurance will provide some relief, it will not be sufficient to prevent this from being viewed as a parliament that witnessed the highest tax increases in recent history, according to experts.
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