In a surprising move, Chancellor Jeremy Hunt managed to cut 2p off National Insurance in last month’s Autumn Statement, providing a benefit to 27 million workers starting January 6. This unexpected tax cut follows Hunt’s previous assertion that delivering such cuts would be “virtually impossible” until the UK economy improves. The move appears strategically timed, coinciding with the looming possibility of a general election. With another election anticipated by January 2025, and a potential arrival as soon as May, Hunt and Prime Minister Rishi Sunak are likely to continue battling to bolster Conservative Party fortunes and diminish Labour’s lead in the polls.
The Autumn Statement’s National Insurance cut, while seemingly generous, only offsets a quarter of the tax hikes imposed by Hunt and Sunak since 2021. These include punitive income tax and National Insurance threshold freezes, expected to continue until 2028. Consequently, three million more low earners are projected to begin paying income tax, with an additional two million paying the higher rate. Pensioners, exempt from National Insurance, did not benefit from this cut but are set to receive an 8.5% state pension increase in April, thanks to the triple lock.
Looking ahead to 2024, the expectation is for additional “impossible” tax cuts as the government aims to enhance the economy and ease the financial burden on Britons. Inflation and mortgage rates are predicted to continue falling, providing relief to cash-strapped individuals. Despite the positive outlook, it is acknowledged that further substantial tax cuts are needed, rather than the Treasury making small concessions. The recent drop in inflation over the last few months may provide Hunt with more flexibility to implement a proper tax cut.
Market indicators suggest a 50% chance that the Bank of England will cut the base rate from the current 5.25% as early as March, potentially reaching 3.75% by the year-end. Falling yields on gilts issued by the Bank of England to fund government spending further support the anticipation of falling borrowing costs. Although borrowing costs are expected to ease, public borrowing remains a concern, reaching £14.6 billion last month, the second-highest November figure on record. Despite the challenges, the need for growth is emphasized, and a tax cut is seen as a potential catalyst to boost sentiment, encourage investment, and spur spending in the UK economy.
