Is the National Insurance 2p cut wiped out by Income Tax freeze? Figures show it’ll boost typical pay by just £2.68-a-week…

Chancellor Jeremy Hunt has announced a cut to National Insurance contributions for millions of workers in today’s Autumn Statement. 

Greater fiscal headroom has allowed Hunt to roll the dice ahead of an expected election next year.

He slashed National Insurance contributions from 12 to 10 per cent, as part of a raft of measures intended to boost growth.

While Hunt faced pressure from backbenchers to slash income tax, he resisted in favour of a 2p cut to National Insurance contributions for employees and self-employed workers.

A cut to NI will mirror the effect of an income tax cut and increase take-home pay, but will not have any impact on those above the state pension age.

Who will benefit from a cut to National Insurance?

Millions of workers have been hit by rising taxes, which have risen to their highest level since records began 70 years ago, according to the Institute for Fiscal Studies.

At the last election, UK tax revenues amounted to around 33 per cent of income. By the time of the next election next year, the IFS forecasts it will rise to 37 per cent.

Hunt reintroduced the hike to NI last autumn in a bid to steady the ship following Kwasi Kwarteng’s ill-fated mini-Budget.

Hunt has cut NI contributions from 12 per cent to 10 per cent, which will take effect from 6 January, and affect 27million workers across the UK.

Those over the state pension age – currently 66 – don’t pay National Insurance but are subject to income tax, so today’s cut will not have an impact on pensioners.

How does a cut to National Insurance affect you?

Calculations from Quilter estimate that a taxpayer on an average salary of £34,963 could save over £400 a year from a one per cent cut to National Insurance.

The current level of 12 per cent sees workers taxed £2,687.16 year in NI alone, which will fall to £2,239.30, making a saving of £447.86.

Workers on £30,000, who pay £2,091.60 in NI per year, are set to save £348.60, while those earning £40,000 are set to have £548.60 more in their pocket.

Those earning £50,000 a year, are set to pay £3,743.00 in NI contributions, down from £4,491.60, making a saving of £748.60 per year.

But frozen tax bands limit savings made

Even with a cut to NI, the freezing of tax thresholds until 2028 are set to cost taxpayers hundreds of pounds a year.

Shaun Moore, tax and financial planning expert at Quilter said: ‘Hunt has given workers a miniscule nibble of carrot with his 2p cut to National Insurance contributions after they’ve been battered by stick recently. 

‘The reality is workers are just £2.68 a week better off due to today’s tax ‘giveaway’ than they would have been had tax thresholds not been frozen.

‘More money in people’s pockets thanks to tax cuts is no doubt a good thing but this move gives someone on the average salary of £32,963 an extra £8.60 a week due to the NI cut.

‘But the reality is you only are getting a benefit of around 50 per cent of this due to the frozen tax bands and fiscal drag.

‘If we assume the tax bands had increased by 2 per cent over the last four years, someone earning £34,963 should be a further £308.40 better off. 

‘Therefore, if you take this off today’s headline saving in tax it is actually only a saving of £139.46 over the year or a rather measly £2.68 a week.’

More people are being pulled into a higher tax bracket as inflation remains above the Bank of England’s two per cent target and wage growth surges.

It means many workers will have to start paying income tax for the first time, or move up a bracket as incomes increase.

This is what is known as fiscal drag and a record number will find some of their earnings fall within the higher 40 per cent income tax.

The Government uses September’s inflation figure, which held steady at 6.7 per cent to determine the personal allowance and income tax bands for the following April.

This would have meant a 6.7 per cent uplift in the amount taxpayers can earn tax-free, and the same increase in the basic rate band before 40 per cent income tax is due.

Instead, the average worker faces another year with the same allowances following a freeze in the tax brackets until the 2027/28 tax year.

Will cutting National Insurance help the economy?

Hunt is hoping that a tax cut can help to boost economic growth, but a closer look suggests there will be implications for the wider economy.

Chiefly, some experts predict that increasing people’s disposable income could lead to more consumer spending, which would risk fueling inflation.

While inflation fell more than expected in October, now at 4.6 per cent, the Bank of England governor Andrew Bailey warned against underestimating persistent inflation.

He told MPs: ‘We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2 per cent… And I think the market is underestimating that.’

Increasing people’s disposable income by cutting NI could lead to more consumer spending, fueling another rise in inflation.

Steven Cameron, pensioners director at Aegon said: ‘The Chancellor has confirmed he will not take risks with regard to inflation. 

‘But, the cut in National Insurance does put more money in people’s pockets, creating some inflationary risk. Clearly, it’s a gamble he’s prepared to take having taken soundings from the OBR.’

A fall in tax revenue, despite some fiscal headroom, could also spell trouble down the line for public services.

‘National Insurance contributions provide funding for essential benefits, including the state pension,’ said Cameron.

‘Although this reduction in contributions will be welcomed by many, it could further strain the sustainability of the state pension due to an aging population and the triple lock mechanism leading to substantial pension increases.

‘Without additional funding from general taxation, the affordability of the state pension may become increasingly challenging.’