Households are likely to face ‘higher taxes’ in the next few years despite the Government’s recent cut to the National Insurance rate, experts claim.
On 6 January, the National Insurance rate was cut from 12 per cent to 10 per cent, which Chancellor Jeremy Hunt claimed would equate to “nearly £1,000 for a typical two-family family”.
Despite this reduction, experts warn that the overall tax burden on low-income families will rise in the next two years.
This is primarily due to the financial drag that occurs when wages rise but tax relief thresholds remain the same.
During the 2022 Autumn Budget, Hunt confirmed that current tax relief thresholds would remain at their current level until 2028.
According to the Office for National Statistics, from August to October 2023, total wages rose by 1.2 per cent year-on-year on a CPI real earnings basis.
Withdrawal affects the amount of money people can take home
GT
The last time wage growth was higher was August-October 2021 when it was 1.5 percent.
Meanwhile, regular wages jumped 1.2 percent year-on-year; Growth was last higher in the July-September 2021 period when it reached 2.2 percent.
As it currently stands, any earnings up to the personal allowance of £12,750 pay no tax. Anything between £12,751 and £50,270 pays a 20 per cent tax rate, which is the basic rate.
The top tax rate of 40 per cent applies to profits between £50,271 and £125,140. Any earnings above this limit pay an additional rate of 45 percent.
With the allowances remaining in place for the next four years and wages continuing to rise, low-income households are at risk of paying more in tax.
Speaking to GB News, Chris Demetriou, accountant and co-founder of Archimedia Accounts, said that although the National Insurance rate cut was “undoubtedly a welcome tax cut”, it “may not fully offset the growing impact of the frozen income tax bands.” “. With increased wages.
He added: “My rough estimates indicate that a large segment of low- and middle-income earners will still face higher taxes as a result of financial pressure over the coming years, even after the National Insurance cut comes into effect.
“It is also worth noting that the reduction only applies to employees’ National Insurance – self-employed people will not receive the same reduction.”
Families are being dragged into paying taxes due to the threshold freeze GT
Treasury forecasts predict 1.3 per cent annual growth in average income between this tax year and 2026/27.
However, if wage increases exceed this estimate, households may be unexpectedly pulled into higher tax thresholds.
“Of course, a lot will depend on the state of the broader economy,” Demetriou said.
“But based on past trends and current inflation rates, I would not be surprised to see that the fiscal burden far outweighs the reduction in national income for a large proportion of taxpayers in the long run.”