What does Rishi’s National Insurance giveaway mean for YOU? Workers on less than £12,570 pay NOTHING

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Rishi Sunak moved to alleviate the pain of a planned National Insurance rise for millions of workers today as he unveiled a massive increase in the threshold at which the tax is paid.

It means that Britons on lower and medium incomes will end up paying less towards national insurance contributions (NICs) every month, because the rise in the threshold cancels out the effect of the hike in NICs due to come into effect in on 6 April.

Analysis from This is Money shows that the move means that people earning more than £50,000 a year will still pay more in contributions.

Everyone will temporarily start paying more every month for National Insurance in April when the planned rise comes in, before the threshold increase takes effect in July,

For example, someone earning £30,000 a year currently pays £204.25 a month in NICs. From April they will pay £222.15 a month, but in July will start paying £192.46.

An employee earning £100,000 a year currently pays £489.90 a month in NICs. From April this will go up to £580.65 a month, before falling slightly to 548.71 a month in July.

The Chancellor was thought to have been mulling an increase in the salary at which people begin making national insurance contributions (Nics) by a few hundred pounds from £9,568.

But he stunned MPs by increasing it by £3,000 to £12,570, an increase of more than 31 per cent, to bring it into line with the threshold for paying income tax. 

But he rejected pressure from Labour and his own Tory backbenchers to scrap the total  1.25 percent rise in Nics due to come in from next month in the face of rising living costs. 

Mr Sunak told the Commons that the money was needed to help the NHS recover from the ravages of the Covid pandemic. 

He said: ‘Our current plan is to increase the NICs threshold this year by £300, I’m not going to do that – I’m going to increase it by the full £3,000, delivering our promise to fully equalise the NICs and income tax thresholds.

‘And not incrementally over many years, but in one go, this year. From this July, people will be able to earn £12,570 a year without paying a single penny of income tax or National Insurance.

‘That is a £6 billion tax cut for 30 million people across the UK. A tax cut for employees worth over £330 a year. The largest increase in a basic rate threshold ever. And the largest single personal tax cut in a decade.’

The Office for Budget Responsibility (OBR) downgraded growth in gross domestic product – a measure of the size of the economy – from the 6 per cent forecast for this year at the time of the Budget in October to just 3.8 per cent.

Next year’s growth forecast has been downgraded from 2.1 per cent to 1.8 per cent.

Inflation hit 6.2 per cent in February, up from 5.5 per cent in January, again reaching the highest level since March 1992, when it stood at 7.1 per cent.

Mr Sunak said inflation was forecast to average 7.4 per cent this year due to ‘disruptions to global supply chains and energy markets, combined with the economic response to Putin’s aggression’.

Labour, branding Sunak the ‘high-tax Chancellor’, had joined some Tory MPs in urging Mr Sunak to scrap the 1.25 percentage point hike to NI, which will hit next month just as energy bills soar when the price cap increases.

The struggle facing households was further laid bare by the ONS figures showing an even higher than expected rise to the Consumer Prices Index (CPI) figure for measuring inflation, as it hit the highest level since March 1992, when it stood at 7.1 per cent.

Fuel prices also hit new record highs, with figures from data firm Experian Catalist suggesting the average cost of a litre of petrol at UK forecourts on Tuesday was £1.67, with diesel at £1.79.

Shadow Chancellor Rachel Reeves accused Sunak of delivering ‘increasingly incredible claims’, telling MPs: ‘Perhaps the Chancellor has been taking inspiration from the characters of Alice in Wonderland – or should I say Alice in Sunak-land, because nothing here is quite as it seems either.

‘It’s the sort of place where a Chancellor celebrates giving people £200 to help them with their spiralling energy bills before explaining he needs it all back.

‘In Sunak-land, the Chancellor claims ‘I believe in lower taxes’ while at the same time as hiking Alice’s national insurance contributions. So Alice asks the Chancellor ‘when did lower taxes mean higher taxes, has down really become the new up?’.

‘The Chancellor follows Humpty Dumpty’s advice and says ‘when I use a word, it means just what I choose it to mean – neither more nor less’.

‘Alice knows that under the Conservatives taxes are at their highest level in decades as a result of the policies of this very same Chancellor. In fact, this Chancellor is the only G7 finance minister to raise taxes on working people during this crucial year of recovery. Curiouser and curiouser.

‘As Alice climbs out of the rabbit hole to leave Sunak-land, she recalls the words of the white rabbit and concludes that perhaps the Chancellor’s reality is just different from yours.’

But Mr Sunak has said that as a result of the increase in national insurance thresholds, 70 per cent of workers will pay less tax, even accounting for the levy.

Responding to Ms Reeves he told the Commons: ‘It is the largest increase in thresholds ever, the biggest personal tax cut in a decade and it is worth £330 for those workers and it means, and this is the part that I don’t know if she has realised because she talked about the levy and making sure that we direct our policy at those who need our help, there’s a reason the independent Institute for Fiscal Studies called this the best way to help low and middle earners through the tax system.

‘That is because 70 per cent of workers will pay less tax, even accounting for the levy.

‘It is more generous than the policy she is advocating and combined with the other tax cuts we have announced today, as I said, this plan represents the biggest cut, the biggest net cut to personal taxes in a quarter of a century.’ 

Christine Cairns, tax partner at PwC, said: ‘While the tax-free personal allowance has steadily risen in recent years to £12,570 in line with long-standing Government policy, the NI threshold has lagged behind, quietly hovering below £10,000, partly because it’s so closely linked with state welfare benefits such as pensions and jobseeker’s allowance. 

‘However, last year’s announced 1.25 per cent increase from April brought NI sharply into focus and having reaffirmed his commitment to the rise, increasing the threshold was one of the only options left to try and soften the blow for those who will feel it most.

‘While it might seem curious to be effectively both increasing and cutting NI at the same time, today’s change is clearly targeted at helping those with the lowest earnings who may already be below the income tax threshold. 

‘The true impact of this cut, as well as of the future decrease of the basic rate tax rate, for middle income earners will need to be assessed against the impact of the freezing of the income tax bands until 2026.’

Tory MP Mark Harper had earlier defended a hike in national insurance as a way to put money into the NHS and social care.

He told Sky News: ‘I can’t comment on the specifics of what was going to be announced today, but I think on the national insurance rise, it’s very clear – we’ve said we’re going to put an extra £12 billion into, first of all, into the health service for backlogs that have arisen because of the pandemic, and then a long-term funding settlement for social care.

‘If you’re going to say you’re against the national insurance rise taking place either this year or in the future, you’ve got to say whether you’re prepared to not put that money into the health service or social care, or come up with some other way to pay for it.’

Asked about tens of billions of extra revenue sitting in the exchequer as money Rishi Sunak could use, Mr Harper said: ‘Well, I think one of the problems is everyone’s looking at the upside points, and there may well be – I haven’t seen the forecast – there may well be extra revenue, but I think people are forgetting there are also extra costs.

‘So, there are cost pressures on public services and, also, we’ve obviously had to borrow a very significant amount of money, rightly in my opinion, to deal with the economic impact of the pandemic, but that means the economy is vulnerable to rising interest rates and inflation, and, we saw yesterday, in very significant debt interest payments.

‘The Chancellor has to be mindful of that when he’s making decisions.’