Budget reaction: tax burden set to rise by £81 for low earners and £1,064 for highest earners despite NI cut

• The main rate of National Insurance has fallen from 10% to 8%
• It means annual saving of £349 for someone earning £30,000, rising to £749 for someone earning £50,000 and £754 for higher-rate taxpayers
• However, once fiscal drag is factored, both the lowest and highest earners still face a higher tax burden: extra tax burden of £81 for someone on £20,000 and £1,064 for someone on £100,000
• This is based on a Office for Budget Responsibility (OBR) inflation forecast of 6.1% for the current tax year (2023-24) and the uprating of income tax threshold by the same percentage.

Source: interactive investor. Assumptions: based on Office for Budget Responsibility (OBR) inflation forecast of 6.1% for the current tax year (2023-24) and the uprating of income tax threshold by the same percentage.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “While most taxpayers will benefit from the NI cut, those on the opposite ends of the income spectrum would see the complete nullification of the benefit due to fiscal drag. Someone currently earning £20,000 would lose £81 due to extra tax by the next tax year as more and more of their income is taxed at a higher rate, rising to £1,064 for someone on £100,000, compared to if thresholds rose with inflation.

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“The burgeoning tax burden provides extra impetus to look carefully at various aspects of your finances and tax planning. While salary sacrifice can help mitigate the tax burden, it is important to note that a lower salary can affect entitlements such as maternity/paternity pay, mortgage applications based on one’s income, and some state allowances. As such, people should always consider how such benefits could impact their finances more broadly.”

Alice Guy, Head of Pensions and Savings at interactive investor, says: “Despite the National Insurance cut, many families will still feel poorer than a few years ago as frozen tax thresholds and rising living costs erode the value of the National Insurance tax cut.

“Pensioners won’t benefit from the National Insurance cut as pensioners don’t pay National Insurance on their income. A pensioner with income of £20,000 will pay £230 more tax next year due to frozen tax thresholds, with nothing to mitigate the extra cost.”

General reaction

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “It was a Budget with a square focus on injecting growth into UK plc, which slipped into a recession in the final quarter of last year. The chancellor’s remedy for this is seemingly putting tax cash back into workers' pockets to increase consumption – which is key for economic growth. But the chancellor needed to weigh this up with the need to reduce public debt, which is costlier in a high-interest rate environment, while also ensuring his actions do not fuel inflation. It is a tricky balancing act.

“This backdrop explains why the decision was taken to cut National Insurance instead of income tax – which might have been better received – with the general election in mind. National Insurance is cheaper for the government to implement because it only applies to earned income. So, the cut does not apply to income taken from pensions and income from savings. Those over state pension age (currently 66) don’t pay National Insurance, so most retirees will not benefit from this cut.

“The reality is the amount we get taxed on income is higher than what many people appreciate. We each have a marginal rate of tax which combines income tax and National Insurance. Many graduates with student debt have to add 9p (over the student loan repayment threshold) in the pound to go towards the debt. This is before you factor in interactions with the benefits system, the High-Income Child Benefits Charge, and the withdrawal of Tax-Free Childcare."