An increase to National Insurance contributions that came into effect earlier this year will be reversed from November 6.
Chancellor Kwasi Kwarteng confirmed the news in an announcement just hours before his mini Budget.
National Insurance contributions had increased from 12% to 13.25% in April after a 1.25 percentage point rise was introduced to pay for health and social care.
The reversal of the hike, which was introduced by ex-Chancellor Rishi Sunak, will mean National Insurance contributions go back down to 12%.
Mr Kwarteng said: “Taxing our way to prosperity has never worked. To raise living standards for all, we need to be unapologetic about growing our economy.
“Cutting tax is crucial to this.
“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.”
How much you will save through the National Insurance reversal
You can use our National Insurance calculator here to work out how much you'll save.
We have also broken down the savings further down this article.
National Insurance is a tax on earnings, paid by both employed and self-employed workers.
You pay National Insurance contributions over a certain earnings threshold, with it counting toward your benefit entitlement and state pension in later life.
Once you reach state pension age, you no longer need to keep paying National Insurance.
If you have an employer, you'll pay Class 1 National Insurance contributions.
The amount you pay on National Insurance is then worked out based on your on gross earnings, before tax or pension deductions, above certain thresholds.
You start to pay National Insurance when you earn above £12,570.
When the reversal comes into play, you’ll pay 12% on earnings between £12,570 and £50,270. You currently pay 3.25% on earnings over £50,270 but this will drop to 2%.
The Government has confirmed that these thresholds, which were lifted in July, will remain in place.
New calculations from Interactive Investor show the reversal of the 1.25 percentage point hike will result in an annual saving of £218 for someone earning £30,000, rising to £468 for someone earning £50,000.
Workers with an annual salary of £20,000 would save £93 under the policy, while someone earning £80,000 would be £843 better off.
For someone earning £100,000, the saving would be £1,093. See the full yearly breakdown here:
- Salary - £20,000 ; Current NI - £984 ; After NI reduction - £892 ; Tax saving - £93
- Salary - £30,000 ; Current NI - £2,309 ; After NI reduction - £2,092 ; Tax saving - £218
- Salary - £40,000 ; Current NI - £3,634 ; After NI reduction - £3,292 ; Tax saving - £343
- Salary - £50,000 ; Current NI - £4,959 ; After NI reduction - £4,492 ; Tax saving - £468
- Salary - £60,000 ; Current NI - £5,311 ; After NI reduction - £4,719 ; Tax saving - £593
- Salary - £70,000 ; Current NI - £5,961 ; After NI reduction - £4,919 ; Tax saving - £718
- Salary - £80,000 ; Current NI - £5,636 ; After NI reduction - £5,119 ; Tax saving - £843
- Salary - £90,000 ; Current NI - £6,286 ; After NI reduction - £5,319 ; Tax saving - £968
- Salary - £100,000 ; Current NI - £6,611 ; After NI reduction - £5,519 ; Tax saving - £1,093
This does not include the added impact of the National Insurance threshold rising from £9,880 to £12,570 in July.
Myron Jobson, Senior Personal Finance Analyst, interactive investor, said: “The Government has a tricky balancing act of helping consumers through the unprecedented cost-of-living storm without adding fuel to the inflation fire, while trying to reinvigorate the UK economy.
“Tax cuts seem the current favoured route, and while we assess the impact on workers’ pockets, time will tell the wider impact.
“Tax cuts would put more pounds in taxpayers’ pockets at a time when they need it most to combat raging inflation.
“Tax cuts, in tandem with the Government’s pre-existing multi-billion-pound cost-of-living support measures which includes the recently announced energy price cap freeze, might mean that the cost-of-living squeeze will be less scary than previously predicted for many.”
