The new Chancellor, Kwasi Kwarteng, has confirmed the Tory reversal on the National Insurance (NI) 1.25 percentage point hike from November 6.
Rishi Sunak previously raised the primary NI payment threshold, which is still in effect.
The Chancellor said: “To raise living standards for all, we need to be unapologetic about growing our economy. Cutting tax is crucial to this.
“Whether businesses reinvest freed-up cash into new machinery, lower prices on shop floors or increased staff wages, the reversal of the NICs increases will help them grow, whilst also allowing the British public to keep more of what they earn.”
Quilter tax and financial planning expert Shaun Moore says: “The 1.25 per cent reduction means that someone earning £50,000 a year would see an extra £40 in their pocket each month, equating to £467 extra annually. Whereas the average graduate earning £27,000 would see a miserly £15 extra a month or £180 a year. Reversing the NI hike has a much greater impact on someone earning £100,000, who would save £91 monthly or £1,092 annually.
“The social care levy was also due to apply to pensioners from next year, the NI reversal will save them 1.25 per cent of applicable earnings from 2023.
“It is worth remembering that the national insurance primary threshold is now tied to the personal allowance, which is fixed until at least 2025/26 so the bandings will remain static for a while yet. The government previously announced that the primary threshold and lower profits limit will only increase in line with CPI from the 2026/27 tax year onwards. This means that the benefit to NICs payers will still reduce over time as wage inflation pushes people into paying more.
“Axing this additional 1.25 percentage points of NI contributions will provide a boost for consumers but leaves a gaping hole in Treasury funding plans for social care. Kwarteng says overall funding for health and social care services will be maintained at the same level as if the Levy were in place and come from general taxation.
“This sounds like wishful thinking and is effectively taking a gamble with social care funding in the hope the tax takes increases due to greater economic activity. Let’s hope tomorrow’s ‘mini budget’ reveals more about how the Chancellor plans to raise the much-needed funds for social care.”
AJ Bell head of personal finance Laura Suter says: “In what must be one of the quickest U-turns on a tax rate since the ill-fated ‘Pasty Tax’ a decade ago, the new Chancellor has announced plans to reverse the National Insurance rise brought in by his predecessor. The pledge was a key part of new Prime Minister Liz Truss’ leadership campaign and something she assured the nation she would action as soon as she reached office.
“We’re now in a ridiculous situation where we’ve had three changes to National Insurance in a single calendar year. This is something accountants will struggle to get their head around, let alone the average person just trying to work out what their take-home pay will be. In a cost of living crisis, where the nation is being told to budget and only spend what they can afford, it would be very helpful if everyone could easily work out what their monthly take-home pay will be.
“While being heralded as a tax cut by the government, the move is in fact simply reversing a previous tax rise. Although, in a win for workers, the higher rates of National Insurance will be reversed, but the new higher threshold at which people pay it will be maintained. This means most people earning less than £12,570 will still not pay any tax on their earnings.
“The November deadline for this U-turn makes a mockery of the fact that the previous threshold increase was delayed until July to give payroll departments time to process the change. However, even the Government admits that many people won’t see this change hit their payslips in November, as it might take some payroll departments until 2023 to get their systems in order.”
Aegon pensions director Steven Cameron says: “Chancellor, Kwasi Kwarteng, has announced a reversal of the 1.25 basis point increase in employee and employer National Insurance Contributions introduced last April by his predecessor Rishi Sunak.
“The money raised by the increase was to provide additional funding to support the NHS recover from the pandemic and over time to pay for the government’s share of its new social care deal. It’s good news the government said it is committed to maintaining the funding for the NHS and care sector, worth around £13 billion a year, despite the levy being scrapped, but questions remain over whether this will be possible alongside speculation around other income tax cuts.
“While reversing the NI increase will lead to an increase in take-home pay for most, it would not make any difference to those earning under the £12,570.”