The government has confirmed that it will reverse the 1.25p in the pound increase in National Insurance (NI) which began in April. It's the latest in a series of changes to the tax in the past year and here our Head of Tax Andrew Diver explains what it means to you.
Ahead of the mini budget on September 23, Chancellor Kwasi Kwarteng has announced that April’s National Insurance hike is to be reversed from November 6.
The 1.25 percentage point increase was introduced under former Chancellor Rishi Sunak, but during the Tory leadership race Liz Truss pledged to change it.
Mr Kwarteng 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."
So, what’s the background to this?
Well, since April 6, workers and employers have been paying an extra 1.25p in the pound for national insurance as part of the government's plan to fund the NHS and social care.
It took the rate of NI to 13.25%.
The increase meant the government went back on its 2019 election manifesto promise not to raise the tax but to make up for it, they decided that from July 6, workers would be able to earn £12,570 a year before they had to start paying NI – an increase from the previous threshold of £9,880.
The combination meant that anybody earning below about £34,000 paid less NI than they were before, while anybody earning above that paid more.
But in a spectacular U-turn, the new government has announced that the 1.25p in the pound increase will be reversed as of November 6, ahead of the original plan to keep it in place until April 2023, when a new Health and Social Care Levy would be introduced, at a rate of 1.25%.
This levy – unlike NI – would also have been paid by people over the state pension age who were still working.
The new levy will now not be introduced in April 2023 either.
The original 1.25 percentage point increase in NI was supposed to raise £12bn a year.
But although the extra money was planned to go towards easing pressure on the NHS and social care system, today the government said that funding for health and social care services will be maintained at the same level. They haven’t actually explained where the extra money will come from however.
Nevertheless, right now this is all good news because scrapping the NI rise will reduce tax for 920,000 businesses by nearly £10,000 on average next year.
What’s more, cancelling the planned Health and Social Care Levy will help almost 28 million people across the UK keep more of what they earn, worth an extra £330 on average in 2023/24, with an additional saving of around £135 on average this year.
Mr Kwarteng said: “This is part of the government’s pro-growth agenda, backing business to invest, innovate and create jobs and helping raise living standards for everyone across the UK.”
In a final note, the Chancellor is expected to announce in his fiscal event tomorrow that the 1.25 percentage point increase to income tax on dividends announced alongside the Levy, and introduced in April 2022, will be reversed from April 2023.
This means that those who pay tax on dividends will save an average of £345 next year.
To find out more about the impact of the mini budget on your finances, you can tune into BBC Suffolk Radio at 10am tomorrow where Beatons will be chatting to presenter Wayne Bavin about the details of the Chancellor’s speech.