Basic rate income tax cut proposed from April 2024

The Chancellor announced in the Spring Statement that the basic rate of income tax would be cut by 1p from April 2024, according to the Resolution Foundation¹. The same briefing describes the measure as a pre-announced cut that "looks set to save the average earner £243 a year"¹. The Institute for Government's analysis of the statement notes that "cutting the basic rate, as the Chancellor proposes to do from April 2024, provides most help to people earning at the top of the basic tax band on over £50,000 a year"².

The income tax cut was announced alongside changes to National Insurance. The Resolution Foundation states that measures in the Spring Statement included "raising the National Insurance threshold from £9,880 to £12,570 in July, a 5p cut to Fuel Duty rates, and a £500 million increase to the Household Support Fund"¹. The Institute for Government reports that the Chancellor "announced he would increase the NICs threshold by £3,000, instead of £300 as previously proposed, saving all but the lowest earners £330"².

The Resolution Foundation's assessment states that the gains from the income tax cut and the higher National Insurance threshold are "more than wiped out by previously announced tax rises: the Health and Care Levy combined with the freeze to Income Tax thresholds"¹. It adds that in 2024-25, when the income tax cut comes into effect, "27 million out of the 31 million people in work will pay more Income Tax and NI as a result of personal tax changes announced by Rishi Sunak"¹. Households in the middle of the income distribution will on average be £535 a year worse off, while losses among the richest ten percent will average over £2,000¹.

The Institute for Government notes that the increase in the National Insurance threshold does little to help benefit claimants, because increases in earned income result in benefits being reduced². For Universal Credit claimants earning just above the new threshold of £12,570, the increase in net earnings of £330 "will be offset by a reduction in their UC of a little over £180", meaning "the net increase in the income of a worker on UC will be £150 a year"². For claimants getting both Universal Credit and Council Tax Reduction, "the net increase in income because of the increased NICs threshold is not £330 but £120, once all benefit changes have been included"².

Why it matters for households

The income tax cut is not due to take effect until April 2024¹. The Resolution Foundation states that the average earner would save £243 a year from the 1p cut¹, but that previously announced tax rises, including the Health and Care Levy and the freeze to income tax thresholds, mean 27 million out of 31 million people in work will pay more income tax and National Insurance in 2024-25¹. Households in the middle of the income distribution will on average be £535 a year worse off, and losses among the richest ten percent will average over £2,000¹.

The National Insurance threshold rise from £9,880 to £12,570 takes effect in July 2022¹. The Institute for Government states that this saves all but the lowest earners £330², but that for working benefit claimants the gain is reduced by benefit tapering. For a worker on Universal Credit, the net increase in income is £150 a year². For those receiving both Universal Credit and Council Tax Reduction, the net increase is £120².

The Resolution Foundation states that the typical working-age household faces an income fall of 4 per cent, or £1,100, in 2022-23, and that the poorest quarter of households are set to see their real incomes drop by 6 per cent as benefits fail to keep pace with rising prices¹. It adds that a further 1.3 million people will fall into absolute poverty next year, including 500,000 children¹.

What happens next

The National Insurance threshold change takes effect in July 2022². The 1p cut in the basic rate of income tax is due to take effect from April 2024². The Resolution Foundation notes that the Chancellor's headroom against his fiscal rules has increased to £28 billion, equivalent to a further 4p to 5p cut in the basic rate of income tax¹.