Think tank warns lower NI favors top half of UK earners

Resolution Foundation warns lower earners’ gains will vanish with April’s income tax increase.

A prominent think tank has cautioned that the lower half of earners will not retain any benefits from the upcoming reduction in national insurance payments, as their income tax bills are set to increase in April.

According to the Resolution Foundation, the simultaneous reduction in national insurance contributions (NICs) starting on January 6 and the freezing of income tax thresholds, which brings more individuals into higher tax brackets as their incomes increase, will exclusively benefit earners in the top half with incomes exceeding £26,000.

The think tank highlighted in its New Year’s message that individuals earning around £50,000 annually would experience the most significant gains, outlining the winners and losers resulting from government policies.

These findings will come as a setback to the government, which has showcased the reduction in workers’ Nics rate from 12% to 10% as a demonstration of its overarching goal to decrease taxes for households in the UK over the long term.

Jeremy Hunt has indicated that the government intends to decrease taxation once the economic conditions improve. Recent reports have hinted at the possibility of cuts to inheritance tax and reductions in other levies in the chancellor’s spring budget, scheduled for 6 March, further fueling speculation about a potential May election.

Rishi Sunak is reportedly prepared to support an election in that month, as it would occur after the majority of households have experienced the impact of the national insurance increase but before the adverse effects of the frozen income tax thresholds are fully felt.

Nonetheless, the Resolution Foundation pointed out that the actual purchasing power of wages, accounting for inflation, would still be lower than during the last general election in December 2019. Additionally, it highlighted that real wages in 2024 would be equivalent to those in 2006.

The think tank attributed the nearly two decades of stagnant income growth to wages remaining stagnant in the years following the 2008 financial crash, coupled with the recent surge in inflation that has led to a substantial increase in living costs.

The think tank stated, “British households are projected to face a 4% decline, equivalent to an average of £1,200, entering the upcoming election compared to their financial status after the last one. This unprecedented scenario in modern British history calls for a New Year’s resolution to ensure it does not recur.”

On average, households have benefited from the increase in interest rates to 5.25% since December 2021, according to the report, although there were distinct groups of winners and losers.

The impact of higher savings rates this year contributed to an overall increase in incomes by £19 billion. However, the majority of these gains were experienced by wealthier and older households, thereby offsetting the elevated financing expenses for mortgage payers compelled to refinance their loans.

The report noted, “Rising interest rates effectively augmented household income growth in 2023 by a net £19 billion, as the advantages from increased savings income outweighed the losses from higher debt costs.”

This situation is unprecedented, as historically, increasing rates have typically resulted in households becoming poorer. However, this phenomenon is not expected to persist into 2024, as an additional 1.5 million households are projected to experience an average increase of £1,800 in mortgage costs when they remortgage,” it further explained.

The combination of rising mortgage and rent expenses, along with the cessation of cost-of-living payments, means that “the wealthiest half of households are anticipated to witness income growth in 2024, while the least affluent households will face declines in income,” according to the report.

“This nuanced scenario will pose challenges for politicians aiming to simplify matters in a crucial election year. Nevertheless, the overarching narrative for the parliament as a whole is quite straightforward: British households will, for the first time in recorded history, be financially poorer at the end of a parliamentary term than at its commencement.”