Rishi Sunak’s ‘tax cut’ next week leaves millions paying more

Millions of people will pay more tax on their income this year, despite Chancellor Rishi Sunak lauding next week’s increase to the National Insurance threshold as an effective “tax cut”.

On July 6, the NI threshold will rise from £ 9,880 to £12,570, meaning 30 million people will pay less tax, while around 2.2 million will be taken out of paying NI entirely.

However, people earning £50,000 or more will still pay more in NI contributions this year than in the 2021- 22 tax year.

Sean McCann, of advisory firm NFU Mutual, said the increase to NI contributions will affect the “squeezed middle”, who already have to contend with frozen income tax thresholds and the withdrawal of their child benefit.

Because of the Chancellor’s decision to keep tax thresholds frozen until 2026, workers earning £30,000 will pay an extra £1,816 in income tax and NI over the next five years, investment platform Interactive Investor calculated.

The picture is even less rosy for higher earners.

Someone on £ 50,000 – still a basic rate taxpayer – will earn £4,271 less in real terms by 2026 due to the combined impact of frozen thresholds and soaring inflation – while those earning £150,000 will end up paying £15,596 in tax.

As inflation rises and pay increases, more ordinary families will also be stripped of their child benefit. Under the current tax rules, if just one parent earns above £50,000, the “high income child benefit tax charge” kicks in.

Once either parent earns more than £ 60,000 the benefit is wiped out entirely. Although the increase to the NI threshold should provide some relief for lower-income workers who were hit by the 1.25pc tax hike in April, the savings are meagre. The average worker will get a £330 uplift – which works out at just £27.50 a month. Nimesh Shah, of accountancy firm Blick Rothenberg, said the Government must correct its “flawed” policy by abolishing the 1.25pc increase for basic rate taxpayers and increasing income tax thresholds in line with inflation.

One way taxpayers can reduce their NI tax burden is by making pension contributions via salary sacrifice. This can save NI for both you and your employer.