Why the UK government’s tax cuts still leave workers worse off

In a bid to alleviate the economic burden on workers and respond to the cost-of-living crisis, U.K. Finance Minister Jeremy Hunt has announced a significant cut to the National Insurance tax on workers. However, the actual impact of this reduction may be overshadowed by existing freezes on personal tax thresholds, commonly referred to as “fiscal drag.”

The National Insurance tax, which encompasses contributions from both workers and employers, funds state social security benefits, including the state pension, in the United Kingdom. Prime Minister Rishi Sunak’s Conservative government, facing a substantial lag behind the main opposition Labour Party in the polls ahead of a general election, aimed to provide a positive incentive for voters grappling with the cost-of-living challenges of the past few years.

The announced cut will see National Insurance for workers reduced from 12% to 10%, benefiting approximately 27 million individuals. For someone earning the national average yearly salary of £35,000 ($43,774.50), the savings are estimated to exceed £450. Despite being promoted by the Conservative party as the “largest ever tax cut for workers,” it’s crucial to note that this reduction does not shield taxpayers from the impact of frozen tax thresholds, pushing more of their income into higher tax brackets as nominal wages increase.

While the tax cut is expected to cost the government around £10 billion, the independent Office for Budget Responsibility underscores that the continuing effects of multiple freezes and reductions to personal tax thresholds in recent years diminish the relative impact of the National Insurance cut. The Treasury is projected to collect significant revenue over the coming years due to these freezes, highlighting the broader economic context in which such tax adjustments are made.