Workers are set to make savings of up to £754 after the cut to National Insurance but the rate reduction will have “limited benefit” for taxpayers, according to experts. The majority of Britons will now have benefited from the tax cut as today, the last Friday of the month, is payday for many businesses.
As part of his Autumn Budget, Chancellor Jeremy Hunt confirmed the cut to the National Insurance rate. On January 6, the tax rate was slashed from 12 per cent to 10 per cent as the Government pledged to bring down the tax burden.
Experts are warning of the "limited benefit" of the Government's National Insurance cut
GETTY
Despite this promise, experts are warning that other actions taken by the Treasury are negating the savings made by the National Insurance cut.
This is because Mr Hunt also announced the tax allowance thresholds would remain frozen until 2028 which has contributed to fiscal drag.
Fiscal drag takes place when wages rise, but tax allowances remain the same, which results in workers being pulled into higher brackets and paying more.
Experts have referred to this decision by Jeremy Hunt as a “stealth tax” with the Government committing publicly to cutting taxes while generating more revenue for HMRC via frozen allowances.
The tax threshold freeze comes amid the ongoing cost of living crisis which has seen taxpayers saddled with high inflation and rising energy bills.
Speaking to GB News, senior tax associate Ashley Askin broke down how fiscal drag depletes people's tax cut savings.
The Dividend Earner contributor explained: “When tax thresholds aren't adjusted for inflation or wage growth, more income becomes subject to higher rates through no fault of the taxpayer.
“This year, the freeze in personal allowance in the UK has pushed some lower-income earners into paying income tax for the first time. While a tax cut was implemented in recent years, fiscal drag has limited how much financial benefit average taxpayers are realizing.
LATEST DEVELOPMENTS:
Jeremy Hunt has said tax cuts a priority
PA“Essentially, the Government is bringing in more tax revenue by doing nothing rather than actively raising taxes. From a taxpayer's perspective, this feels unfair.
“Tax codes should treat people in essentially the same way year over year, with consistent purchasing power over their after-tax incomes. Otherwise, tax savings are just illusions that disappear due to the rising cost of living.”
The latest tax cut reduces National Insurance by 15 per cent which is a saving of £450 a year for a worker on an average salary of £35,400, according to the Government.
Examples given of the savings that could be made are of an average full-time nurse who will save £520, a typical junior doctor £750 and an average teacher £630.
