UK Finance Minister Jeremy Hunt has announced a significant cut to the National Insurance tax on workers during the government’s spring Budget. The rate will be reduced from 12% to 10%, benefiting a staggering 27 million people and saving them over £450 per year. The tax cut, touted as the “largest ever tax cut for workers,” is an attempt by the Conservative government to appeal to voters amidst a cost-of-living crisis.
However, the positive impact of this tax cut may be overshadowed by the effect of frozen personal tax thresholds, also known as “fiscal drag.” The National Insurance tax is crucial for funding social security benefits, including the state pension. Critics argue that the tax cut does not address the adverse consequences of these frozen tax thresholds, which will raise a significant £44.6 billion by 2028-29 according to the Office for Budget Responsibility (OBR).
The freeze on tax thresholds, which were implemented in 2021 and extended to 2028, means that as nominal wages rise, more people will be pushed into higher tax brackets. This phenomenon is expected to contribute to a 1.4% increase in GDP in taxes from 2019-20 to 2028-29. Both the Resolution Foundation and the Institute for Fiscal Studies have voiced concerns, stating that the majority of the country will be worse off despite the National Insurance tax cut.
Furthermore, it is important to note that the UK’s public finances remain weak, and inflation is expected to remain high. Critics argue that the tax cut, without addressing frozen tax thresholds, will ultimately make this the biggest tax-raising parliament in modern times.
As the Conservative government trails behind the Labour Party in the polls, they are aiming to offer a carrot to voters. However, with the skeptics raising concerns about the impact of frozen tax thresholds, it remains to be seen whether this tax cut will truly address the cost-of-living crisis and improve the financial situation for the majority of the population.
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