Millions will see their pay rise from today

Millions of workers checking their payslips today will see a little bit more cash in their banks following the government’s cut to National Insurance.

Since last autumn, National Insurance (NI) contributions have been slashed by a third – the largest cut in history – for around 27 million UK workers.

The rate has been cut from 12% to 8%, meaning the average employee on £35,4000 will be over £900 better off a year.

An average full-time nurse will gain an extra £1,053 a year, while a typical junior doctor’s salary will go up by £1,508. And an average teacher will get a £1,270 boost.

But because the government chose to freeze tax thresholds, the pay lift from reducing NI contributions will see many more people having to pay income tax for the first time.

Known as a stealth tax, the government has not increased income tax thresholds since 2021. And doesn’t plan to do so until 2028.

This means that when people’s incomes increase thanks to measures like reducing NI, they are dragged into a higher tax band.

The result is that thousands of low-paid workers must now start paying tax on their earnings for the first time. And could be worse off than before the cuts.

Think tank the Institute of Fiscal Studies (IMF) estimates that for every £1 given back to workers this year by cuts to NI, £1.30 will be taken away due to the freeze on tax thresholds. This figure rises to £1.90 by 2027.

While average earners will see their take-home pay increase. Anyone earning the minimum wage who is working 35 hours a week, will now have to pay tax on nearly £8,300.

This is compared to last year when they would have only paid tax on anything they earned over £6,400.

If tax thresholds had increased in line with inflation, workers would have been able to earn up to £15,220 without being taxed. And this would have been worth an extra £2,650 a year to the lowest-paid workers in the country.

What is fiscal drag?

Fiscal drag is where inflation and earnings growth or reductions to tax payments push more workers into paying tax or into higher tax brackets.

Put simply, it is a way to generate more money for the country.

Fiscal drag happens when tax thresholds don’t increase with rising wages or accommodate people earning more from tax cuts.

By keeping the freeze on income tax thresholds, millions more low-income workers will have to pay tax on their earnings.

What are the personal tax allowances?

Workers earning under £12,570 pay no tax. Anything they earn over this up to £50,270 is taxed at a basic rate of 20%. Those earning between £50,271 and £150,000 are charged a higher rate of tax at 40%, and there’s a 45% charge for anyone with a salary above £150,000.

How can I avoid fiscal drag?

If you are on a low income, the only real way to avoid fiscal drag is by reducing your hours, so you earn less which keeps you just below the threshold.