Workers are set to see more money in their pay packets as a rise in National Insurance is being reversed today.
National Insurance contributions rose by 1.25 percentage points in April as part of plans to help pay for social care and deal with the NHS backlog.
Most employees will see a cut to their contribution directly via their employer’s payroll in their November pay – although some may be delayed until December or January.
Almost 28 million people will keep an extra £330 of their money on average next year, while 920,000 businesses will save an average of almost £10,000, the Treasury said.
The measure, introduced by Boris Johnson’s government with Rishi Sunak as chancellor, was reversed by former chancellor Kwasi Kwarteng in his controversial mini-budget last month.
Its scrapping is one of few economic policies planned by Liz Truss and Mr Kwarteng that has not been ditched by new chancellor Jeremy Hunt.
New chancellor Kwasi Kwarteng said the cut in the basic rate of income tax from 20% to 19% would benefit more than 31 million people.
The cut, which applies to people who earn between £12,571 to £50,270, comes a year earlier than planned.
In a surprise move, the 45% highest tax band for people who earn over £150,000 a year has also been axed.
The reduction in income tax, along with the reversal of the National Insurance rise, will see higher earners save more money.
A person earning £20,000 a year will save £167, according to analysts at EY.
Meanwhile, an individual with an income of £40,000 will save £617 and a person with earnings of £60,000 will save £969. A person on £100,000 will get an extra £1,469.
During his mini-budget, the chancellor said high tax rates “damage Britain’s competitiveness” and reduce incentives for new businesses, arguing that tax cuts are “central to solving the riddle of growth”.
Mr. Kwarteng said scrapping the highest 45% tax rate would also “reward enterprise and growth”.
The policy change means people earning more than £150,000 a year will instead pay the tax rate of 40%, which is applicable to earnings of more than £50,270 a year.
However, the change will not apply to Scotland where income tax bands are different. People in Scotland who earn more than £150,000 a year currently pay a 46% rate. The cut in basic rate tax to 19p in the pound also does not apply in Scotland.
Rachel McEleney, associate tax director at consultancy firm Deloitte, said under the new policy, higher rate taxpayers would save £377 next year, compared to this year.
She said the majority of taxpayers in England, Wales, and Northern Ireland, who will pay the basic rate of 19%, will see “some savings, albeit less” from April.
Ms McEleney said for a person will earnings of £200,000 a year, who do not live in Scotland, their income tax bill would be reduced from £74,960 this financial year to £72,083 in next year, resulting in a tax saving of £2,877.
Labour shadow chancellor Rachel Reeves said the mini-budget prioritized big business over working people by relying on a theory of “trickle-down economics”.
“The prime minister and chancellor are like two desperate gamblers in a casino chasing a losing run,” she said in response to Mr Kwarteng’s plans.
Households across the UK have been feeling the pinch of higher prices in recent months, with higher energy bills and rising food prices fuelling inflation to a 40-year high.
The government has announced support to help with energy costs, limiting the typical household bill to £2,500 a year until 2024, but bills are still set to rise in October.
Rebecca McDonald, the chief economist at the Joseph Rowntree Foundation charity, said the government had chosen to “turn its back on millions who are on the lowest incomes”.
“This is a budget that has wilfully ignored families struggling through a cost of living emergency and instead targeted its action at the richest,” she said.
“Families on low incomes can’t wait for the promised benefits of economic growth to trickle down into their pockets.”
However, Mark Littlewood, director general at free-market think tank the Institute of Economic Affairs, said the axing of the highest rate of income tax would mean higher earners would spend “more time boosting their own productivity”
“The additional rate of income tax (45p) was always performative politics rather than sound economics,” he said. “The 1p off the basic rate of income tax will put more money in people’s pockets.”
The abolition of the highest tax band, which was introduced in 2010, came as a surprise to many economists.
“It really is that kind of rabbit out of the hat..that not only is the additional rate going to be completely abolished, but also the cuts to the basic rate of income tax are going to be brought forward a year,” said Michael Brown, head of market intelligence at finance firm Caxton.
Chancellor Kwasi Kwarteng,has announced that the National Insurance increase from April will be repealed starting on November 6.
The 1.25% increase was put in place by the former chancellor Rishi Sunak, but Liz Truss promised to reverse it during the Tory leadership race.
Mr Kwarteng made the announcement ahead of a “mini-budget” on Friday.
He said: “Taxing our way to prosperity has never worked.
“To raise living standards for all, we need to be unapologetic about growing our economy. Cutting tax is crucial to this.”
The Treasury said most employees will receive a cut to their national insurance contribution directly via their employer’s payroll in their November pay, although some may be delayed to December or January.
They calculate that almost 28 million people will keep an extra £330 of their money on average next year, whilst 920,000 businesses are set to save almost £10,000 on average next year thanks to the change
In a tweet, Mr Kwarteng called it a “tax cut for workers”.
I can confirm that this year’s 1.25% point rise in National Insurance will be reversed on 6th November.
Its replacement – the Health and Social Care Levy planned for April 23 – will be cancelled.
The tax hike was put in place to help fix the NHS backlog and fund social care sector improvements. It was due to raise around £13bn per year.
However, Ms Truss argued it was wrong of her party to break its 2019 manifesto commitment not to raise taxes and said the extra funds can be raised through general taxation.
The chancellor confirmed today that the funding for health and social care services will be maintained at the same level as if the levy was in place.
MPs are expected to vote on repealing the health and social care levy once they return from party conferences in October.
“This is delivering on a commitment the PM made on the (Tory leadership) campaign trail,” a No 10 spokeswoman said.
The move comes ahead of Chancellor Kwarteng’s “fiscal event” on Friday when he will set out more details of the government’s plans to cut taxes, including scrapping a planned rise in corporation tax.