- Tax cuts at this week’s Budget could boost take-home pay for UK workers
- Shaving another 1% off NI could save workers up to £377 a year
- Uprating income tax thresholds could lift the personal allowance to over £13,400 and take the higher rate threshold to more than £53,600
- Higher rate taxpayers could be £842 better off if thresholds were increased, illustrating that in many cases lifting thresholds is worth more to taxpayers than cutting rates
Laura Suter, director of personal finance at AJ Bell, comments:
“There’s lots of talk and rumours about what the chancellor might dish out at the dispatch box later this week, but what most people in the country care about is how much the moves might save them. A cut to income tax or National Insurance sounds great, but how much money will it actually put back in the average earner’s pocket? And while taking an axe to the basic rate of income tax would be welcomed by many, is it actually less generous than uprating the thresholds with inflation?”
Income tax changes:
“The freezing of tax thresholds has done serious damage to people’s finances, with the government tax take creeping up. The OBR recently estimated that by 2028/29 the freezing of tax thresholds will see around four million extra taxpayers, three million more moved to the higher rate of income tax and another 400,000 paying the additional rate.
“The combination of frozen allowances at a time of high inflation has been toxic for workers. Restoring increases to tax thresholds will ensure more people pay the tax rate appropriate to their income, considering recent wage inflation.
“Uprating current income tax thresholds by last year’s inflation figure is the most lucrative of the options on the table for higher earners. Uprating it with September’s reading of CPI inflation, which was 6.7%, would increase the Personal Allowance from the current £12,570 up to £13,412 and increase the point you pay higher-rate tax from £50,270 up to £53,638. That would mean anyone earning more than the new higher rate threshold would be better off by £842 a year. It would also benefit basic-rate taxpayers, who would save a more modest £168 a year in tax.
“However, a cut to the basic rate of income tax to either 19% or 18% is the more lucrative option for many basic-rate taxpayers. A cut to 19% would mean a £224 tax saving for someone on £35,000 a year, while a cut to 18% would cut their tax bill by almost £450 a year – far more than the saving they get from inflation uprating. It’s a different story for higher earners – who benefit more from the inflation uprating. Even a cut to 18% for basic-rate tax only nets them £754 in comparison to the £842 they save through thresholds increasing.”
National Insurance Changes
“The government has recently cut National Insurance, but that hasn’t stopped rumours of a further cut to workers’ tax being handed out. The selling point of cutting National Insurance is that it is more targeted at workers, as it isn’t paid by those over state pension age. However, self-employed people are also still waiting for their previously announced cut to NI, due to come in in April, so another one so soon might feel premature.
“In the Autumn Statement the government opted to cut the starter rate of National Insurance from 12% to 10%. This is the rate charged on the band of earnings between £12,570 and £50,270. If it cut that rate again to 9% it would mean an annual saving of £124 for someone on £25,000 all the way up to a saving of £377 for anyone earning more than the £50,270 threshold. A cut to 8% is a big boost for workers, with almost £250 saved by someone on £25,000 and a maximum saving of £754.
“If the government chose to uprate income tax by inflation from April (see above) it could also make a corresponding change to National insurance thresholds – as they currently mirror the income tax bands. Doing this would actually cost higher earners more money – as the band of earnings charged at the starter rate of 10% increases – meaning they face a higher National Insurance bill. While the move would save £84 a year for basic-rate taxpayers it would cost higher-rate taxpayers an extra £185 a year.”
