Millions of employees will see the National Insurance rate cut from 12 percent to 10 percent next month but taxpayers could still end up paying £4,000 more in tax.
Chancellor Jeremy Hunt confirmed a bigger than expected cut to the main rate of National Insurance within his Autumn Statement last month, in order to give taxpayers extra money in their pocket.
However, many households are unlikely to feel the full benefit of this decision due to fiscal drag. This occurs when income tax bands are frozen while income rises, leading to taxpayers being dragged into higher tax bands.
Recent research by interactive investor indicates that fiscal drag will cost higher earners roughly £4,000 in tax and lost Child Benefit by 2027 if tax brackets remain at current levels.
Britons are being dragged into higher tax brackets due to fiscal drag
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The investment service broke down what taxpayers in 2022 will likely have to pay compared to rates going up with inflation:
- High earners with £50,000 salary in 2022 set to pay £1,967 extra tax by 2027
- Middle earners with £30,000 salary in 2022 set to pay £889 extra tax by 2027
- Low earners with £20,000 salary in 2022 set to pay £889 extra tax by 2027
Alice Guy, head of Pensions and Savings at interactive investor, said: “Fiscal drag is silent and ruthlessly efficient way of raising the tax burden over time.
“It works by freezing tax thresholds so that we pay tax on more and more of our income as our wages rise with inflation.
“It’s less obvious than raising tax rates, but potentially has an even bigger impact on taxpayers over time.
“Frozen tax thresholds affect all of us, not just higher earners, because the frozen personal allowance means even lower earners gradually pay tax on more of their income.”
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The average price of car insurance now stands at £924 GETTYAccording to the saving expert, families are more likely to suffer as a result of fiscal drag and should prepare ahead of time to mitigate the impact of the blow on their finances.
Ms Guy added: “If you’re a parent then fiscal drag is potentially even more painful, as you could stand to lose child benefit as your wages gradually rise with inflation.
“The threshold for the high-income child benefit charge has remained frozen at £50,000 since it was first introduced in 2013, drawing more and more families into the charge.”
The main rate for National Insurance contributions will be reduced from 12 percent to 10 percent from January 6, 2024.