How much will the income tax and NI cuts save you?

It was called a ‘mini-Budget’, but in reality it was far from small. In his maiden speech as chancellor, Kwasi Kwarteng announced aggressive tax cuts not seen since the 1970s.

Kwarteng delivered two rabbits out of the mini-Budget hat: lowering the base rate of income tax to 19p and abolishing the additional 45p rate of income tax from April next year.

This means that all major earners over £50,270 will pay 40 percent tax, rather than the current 45 percent rate of over £150,000. The base tax rate will be reduced from 20p to 19p in April for income between the £12,570 tax-free personal deduction and the higher rate threshold.

The removal of a National Insurance increase from earlier this year was also confirmed.

We look at what the changes in income tax and national insurance contributions mean for people, how much they can save… and whether the plan is working to stimulate the economy.

How much do you save on income tax?

The chancellor has brought forward the planned 1 pence cut in the base rate to April, which the government says will “encourage business and hard work and simplify the tax system”.

The base rate of income tax will be reduced from 20p to 19p from April 2023 instead of April 2024.

The government estimates that this will save households an average of €170 per year.

People who earn £20,000 a year save £74.30 a year from the income tax cut alone, according to accountants Moore Kingston Smith, while those on £50,000 are £374.30 better off.

However, the biggest savings are with the highest earners, as the Treasury completely abolishes the addition rate. They now pay 40 percent instead of 45 percent.

This means that, according to Kwarteng’s proposals, someone making £200,000 a year will be better off £2,877 a year, while those making £500,000 will save nearly £18,000 a year.

How much do you save on national insurance?

The National Insurance hike introduced earlier this year will be reversed from November, putting more money directly into the pockets of millions.

Those who earn £20,000 will save £143.57 from the NI reversal, almost double what they will save from the change in income tax.

Those making £150,000, who will benefit from the abolition of the additional tax rate, will save £1,091 from the NI reversal alone.

People who earn £500,000 save just over £3,500.

Those who do not pay National Insurance, the vast majority of whom are retirees, will not benefit.

How much will you save from both tax cuts?

The NI reversal and the new income tax rate will put more money in people’s pockets, although the biggest savings will come from the highest earners – this is because they pay more National Insurance and the effect of abolishing the 45p tax.

Someone making £200,000 saves £2,877 a year. This rises to £4,333.07 if you include the reversal of the 1.25 percentage point NI increase.

Someone making £500,000 will make £17,877 more with the new 40 percent rate, which rises to £21,520.57 with the NI reversal.

In comparison, a person making £20,000 saves just over £200 a year.

Why is the government cutting taxes now?

The UK tax system is complex and there has long been a call for simplification of the system. But given the energy crisis and the potentially looming recession, it may seem like an odd time to cut taxes.

It marks a significant departure from the previous administration’s fiscal policy. Paul Johnson, director of the Institute for Fiscal Studies, says, “It’s been half a century since we announced tax cuts of this magnitude.”

Rachael Griffin, financial planning expert at Quilter said: “As the UK government faces a black hole in its finances due to the pandemic and the energy price guarantee, Kwarteng supports the theory that you can cut taxes to increase revenue and it can be proved that he does. are correct, as some people would no longer keep their income low to avoid the extra rate.

‘Truss and Kwarteng send out a conservative signal that they want people to do well.’

The government is already being criticized for its decision to abolish the additional tax rate of 45 percent.

“Abolishing the cap on bankers’ bonuses and removing the 45 percent tax rate will increase the UK’s attractiveness as a place for financial services to locate their highest-earning employees,” said Tim Stovold, head of tax at Moore Kingston. Smith. “Today’s tax announcements will disproportionately benefit the very high earners.”

Will lowering taxes help the economy?

Growth was central to today’s budget, with the Chancellor’s package aimed at tackling the UK’s low productivity.

Tax cuts were among Kwarteng’s measures to signal a ‘new approach for a new era’ and end a ‘vicious circle of stagnation’.

But is this the most effective way to grow the economy?

The government is betting that a historically large package of tax cuts could propel the UK economy towards a higher growth rate in the long term. And that growth will be necessary if the chancellor hopes to balance the books, as the plans announced today require a substantial increase in loans,” said Ed Monk, associate director for personal investing at Fidelity.

Many households will see an immediate increase from the measures announced today, but any savings will likely be spent on higher energy bills and mortgage payments.

“Although the government has contributed to energy bills, households are still facing a dramatic increase. So whatever they’re saving now in income tax, National Insurance and for movers, stamp duty, it’s still unlikely to go into discretionary spending,” said Becky O’Connor, head of pensions and savings at interactive investor.

Indeed, with inflation remaining high, confidence low and interest rates rising, if some money is left at the end of the month, it might go straight to savings and investment accounts rather than the economy. And crucially, it seems unlikely that these changes will reverse inflation, which could demand as much from households as these tax cuts free up.”

Markets also seem unconvinced that the Chancellor’s plan will revive the economy anytime soon.

UK government bonds were in sharp decline and the pound collapsed after the mini-budget.

This will worry Treasury officials as the cost of paying down the country’s debts rises as government borrowing rises and tax revenues fall.

Will Stevens, of Killik & Co, said: ‘The government is clearly striving to improve the UK’s competitiveness compared to competing economies, encourage entrepreneurship and increase discretionary spending.

“However, the longer-term effect of this could put even more pressure on already high inflation and there are fears that future generations will have to foot the bill for the tax cuts now being implemented.”