Low earners to pay £401 more tax next year, despite NI cuts

New calculations from interactive investor show that National Insurance cuts are wiped out by continuing impact of frozen tax thresholds, known as fiscal drag.

• Low earners are due to pay £401 more tax in 2024-25, compared to if tax thresholds kept pace with inflation, despite paying £209 less National Insurance
• Average earners due to pay £124 more tax next year, despite £486 saving due to National Insurance cut
• High earners will still pay £381 extra tax in 2024-25 due to frozen thresholds

Assumptions, sources and methodology:

• Total extra tax compares the tax due if thresholds rose with inflation until 2027 but without NI cut, compared with the actual tax due including NI cut
• Tax saving due to NI change compares tax due based on pre-autumn statement tax regime compared to tax due after NI cut
• Extra tax due to fiscal drag compares tax due before NI cut to tax due if thresholds rose with inflation until 2027 without NI cut
• Earnings assumed to increase with inflation, inflation figures use OBR forecast up to Q1 2025 and then 2%

Alice Guy, Head of Pensions and Savings, interactive investor says: “Fiscal drag is a ruthless and silently effective tax policy and leads to us all feeling a lot poorer over time.

“Frozen tax thresholds have a devastating impact on those earning just below a tax threshold, with low earners paying the biggest price. Fiscal drag is painful for all of us, but high and middle earners will benefit slightly more from the National Insurance cut, than low earners. However, everyone will still pay a lot more tax overall.”

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“If you can afford it, then paying more into your pension is one simple way to reduce your personal tax burden. Some employers will allow you to pay into a workplace pension through salary sacrifice. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount as pension contributions. Basic-rate taxpayers get 20% pension tax relief, turning a £80 contribution to £100. If you are a higher-rate taxpayer, you could reclaim an additional 20% tax on your pension contributions, for a total of 40% tax relief.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The cut to class National Insurance while maintaining the deep freeze in tax thresholds amounts to giving with one hand and taking away with the other. Unfortunately for workers, the pendulum will increasingly swing against them over time as wages grow while tax thresholds remain unchanged. This sneaky tax grab is set to be a money-spinner for the government, estimated to raise £42.9 billion by 2027-28 according to the OBR, costing the average worker £124 next tax year according to our calculations - despite reduction in NI.

“It is the ultimate stealth tax which is a difficult pill to swallow at a time when so many are still reeling from the cost-of-living budget squeeze.”