Stealth tax and savings shake up salary bands

Fiscal drag raises tax burden for many. Following the recent Spring Budget, NI rates in the UK will decrease by 2%. 

Following the recent Spring Budget, National Insurance (NI) rates in the UK will decrease by two percentage points, reducing to 8% on earnings between £12,570 and £50,270, down from the current 10%.

This change, effective from April, appears to initially increase take-home pay for workers. However, tax thresholds, including the starting point for income tax and NI contributions, are frozen until 2028. This freeze, despite potential wage increases due to inflation, results in what is known as “fiscal drag” or a “stealth tax”, indirectly raising the tax burden over time.

By considering both the NI reduction and the impact of frozen tax thresholds, it can be calculated whether individuals have received a net tax cut or increase over the past year.

The Office for Budget Responsibility (OBR) notes that if the basic tax threshold had risen with inflation, it would reach £15,220 by 2024/25, providing £2,650 more tax-free income. Consequently, workers earning between £32,000 and £55,000, or above £131,000, will benefit from the government’s tax adjustments, saving or losing differing amounts depending on their income bracket.

For example, a £50,000 salary yields a £752 annual saving, while someone on £16,000 pays an additional £607. These calculations exclude specific tax deductions or credits, with the ongoing freeze until 2028 likely to disadvantage most UK residents amid the highest tax burden in 70 years. Internationally, however, the UK’s tax rates remain comparatively moderate.

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