Quilter: How rumoured cuts to income tax and National Insurance at the Autumn Statement would impact your client’s finances

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Shaun Moore, tax and financial planning expert at Quilter, has explained the ways in which the rumoured income tax and national insurance cuts would impact finances.

With the Conservatives becoming increasingly worried about their electoral prospects, a roll of the dice might be required. Despite inflation only just coming under some semblance of control, tax cuts are rumoured to be back on the table.

Below are the implications of these rumoured adjustments and their impact on individual finances:

 
 
  • 1p cut to basic rate income tax – worth a maximum of £377

“A 1p reduction in the income tax basic rate, which is currently pegged at 20%, would result in a 1% decrease in the tax rate. This move would directly benefit taxpayers in the basic rate band, allowing them to save a maximum of £377 annually.

“Such a cut would increase disposable income for these taxpayers, potentially leading to increased consumer spending which can stimulate economic growth. But the truth of the matter is over the course of a year the change only equates to £7.25 a week more. Every little helps but especially considering the recent rampant inflation, that is barely enough to pay for an extra loaf of bread, pint of milk and a Sunday newspaper.

“Conversely the fairly meagre impact of the change needs to be balanced against the reduced revenue for the government, which could impact public services and investments. Similarly, the spectre of inflation is still looming large and such a change could see inflation stay higher for longer or even start increasing again. This could be a risk that doesn’t bring the right level of reward.”

 
 
  • 1p cut to National Insurance

“A similar 1p cut in National Insurance contributions, specifically for the 12% rate, would mirror the benefits of the income tax cut. Individuals would save an equivalent maximum amount, under the assumption that only the 12% NI rate is altered.

“This reduction in NI contributions increases the take-home pay for employees, enhancing their financial stability. It could also be beneficial for businesses, reducing the cost of employment (assuming the same 1% reduction to employer contributions). However, as NI contributions are crucial for funding certain public services, including the NHS and state benefits, a cut here could have broader social implications and again could prove to be inflationary.”

  • Increase to basic rate income tax threshold (currently £37,700)

“Increasing the basic rate tax band limit (currently £37,700) means more of an individual’s income is taxed at the lower rate before moving into the higher rate tax band. For each £1 increase in the limit, it’s worth 20p, considering the difference between the 40% higher rate and the 20% basic rate.

 
 

“Expanding the basic rate band is a significant boon for middle earners, effectively reducing their tax burden. It’s a move that can be seen as a gesture towards tax relief for the middle class. However, this too reduces the tax revenue for the government, potentially leading to budgetary constraints in other areas which look potentially set to be offset by less generous benefits. Some might see this as stealing from the poor to give to the rich. The reality also is that a lowering of benefits has a much greater impact than lowering taxes for middle earners as someone earning £55,000 would be £460 better off if the threshold moved to £40,000, which is certainly nice to have back in your pocket but unlikely to be that life enhancing.”

Overall impact

“These proposed tax changes, if implemented, equate to a very small amount of money in a lot of people’s pockets. This may lead to a short-term economic boost through increased consumer spending but this is not a forgone conclusion. This feels like a publicity stunt and the real world impact will be minimal but may put public finances back on shaky ground. The government would need to balance these cuts with its spending obligations, potentially leading to adjustments in public service funding or shifts in other areas of fiscal policy.

 
 

The proposed changes reflect a delicate balancing act between stimulating economic growth, satiating the desires of the Tory backbenchers, maintaining fiscal responsibility and gaining some much needed popularity from the electorate before next year’s general election. These changes if implemented may not fully address any of these concerns.”

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