Chancellor Kwasi Kwarteng has announced that a 1.25% rise in national insurance contributions (NICs) will be reserved from 6 November, while a tax hike to fund health and social care will also be axed.
The decision comes ahead of a mini-Budget on Friday, and delivers on a key pledge from Liz Truss to cut taxes and promote economic growth.
The rise was first introduced in April 2022 under former chancellor Rishi Sunak, however, the new prime minister vowed to change it during the Conservative leadership race.
Scrapping the national insurance rise now means almost 28 million people will get to keep an extra £330 of their money on average next year, while 920,000 businesses are set to save £9,600.
For small and medium companies who see their NICs bills reduced, the average saving is £4,200 and £21,700 respectively in 2023-24.
I can confirm that this year’s 1.25% point rise in National Insurance will be reversed on 6th November.
Its replacement - the Health and Social Care Levy planned for April 23 - will be cancelled.
A tax cut for workers. More cash for businesses to invest, employ and grow. pic.twitter.com/qssnBaNywK
— Kwasi Kwarteng (@KwasiKwarteng) September 22, 2022
Firms will no longer have to pay a higher level of employer national insurance, and will be able to invest the money as they choose, the Treasury Department said on Thursday.
"As a result of this tax cut, businesses will have more money to invest in becoming more productive, pay higher wages, create more jobs and support the overall growth of the UK economy," it said.
The sectors benefitting most from the change are professional, scientific and technical; wholesale and retail trade, repair of motor vehicles and motorcycles; and construction.
Meanwhile, the government also confirmed the cancellation of the planned Health and Social Care Levy – a separate tax which was coming into force in April 2023 to replace this year’s national insurance rise.
As part of the cancellation of the Levy, the finance minister is set to confirm that the increases to dividend tax rates will be scrapped from April 2023 in his Growth Plan tomorrow.
The increased dividend tax was introduced to ensure those who gained income from dividends contributed the same amount to help fund health and social care, to aid the economic recovery from the coronavirus pandemic. The levy was expected to raise around £13bn a year.
However, the money will now come from general taxation. Kwarteng said that the funding for health and social care services will be maintained at the same level as if the levy was in place, protecting the NHS through the winter and ensuring long-term investment in social care.
“Taxing our way to prosperity has never worked. To raise living standards for all, we need to be unapologetic about growing our economy,” he said.
“Cutting tax is crucial to this – and whether businesses reinvest freed-up cash into new machinery, lower prices on shop floors or increased staff wages, the reversal of the Levy will help them grow, whilst also allowing the British public to keep more of what they earn.”
When will people receive the extra cash?
Most employees will receive the cut in their November 2022 pay directly via their payroll.
Basic rate taxpayers will on average see a gain of approximately £75 in 2022-23 rising to £175 in 23-24, and higher rate taxpayers, these figures are on average £300 in 2022-23, rising to £700 in 23-24.
For additional rate taxpayers, the gain will be on average approximately £1,650 in 2022-23 rising to £3,890 in 23-24.
Self-employed people and company directors will pay a blended rate of National Insurance – taking into account the changes in rates throughout the year – when they submit their annual self-assessment return.
What about income tax on dividends?
From April 2023 the government is reversing the 1.25 percentage point increase to the rate of income tax on dividends which took effect in April 2022.
It said the move is designed to support entrepreneurs and investors as it seeks to raise living standards through economic growth.
Watch: Kwarteng to deliver biggest tax cuts since Nigel Lawson’s Budget 34 years ago, says IFS