There is likely to be a real tax cut boom in 2024.
We have already seen the first big change with the drastic cut in social security contributions. Now we are hearing rumors about a whole series of possible cuts later in the year.
Unfortunately, this is not nearly as good as it sounds.
social security
Cutting social security contributions may not make you better off.
On paper, this is a real relief. Class 1 national insurance contributions (NICs), which are paid on incomes between £12,570 and £50,270, have been cut by two percentage points. That’s a saving of £349 a year for someone on a £30,000 salary, and £754 for anyone earning above the top rate limit.
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In reality, however, for many people this will be completely negated by the impact of the freeze on income tax and national insurance limits. When you add together the tax cut and the freeze, anyone earning £26,000 or less will either be worse off than before the limits were frozen – or no better off. Only higher earners will benefit, according to a study by the Resolution Foundation think tank.
Possible tax cuts
Since this is an election year, it is wise to invest in tax breaks to sweeten the vote.
With the budget announced for March, there are some strong candidates for tax cuts, including halving inheritance tax to 20%. This would go down well with the growing number of people whose estates will exceed the exemption limits. However, it benefits a small, wealthy part of the electorate and so does not have a truly broad appeal, making it less likely to pass.
There is also talk of a possible stamp duty cut – to help first-time buyers. However, as we are currently in the middle of a temporary reduction in this tax, it is far more difficult to pull this lever.
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Then there is the option of an income tax cut. This would benefit more people, so it may be worth the extra cost to the Treasury just before an election. The government may also be keen to ensure that people benefit from the cut before they vote, which could mean that the cut could be introduced as early as the start of the next tax year. At the moment, this option seems to be the favourite.
What does this mean for you?
At a time when we are under severe pressure from taxes, this would be a welcome step, but it is far less impressive than it appears at first glance.
With no sign of the tax allowance freeze ending any time soon, this means that taxes for those who exceed the allowances will continue to rise despite the cut.
Already in the current tax year, there are 8% more taxpayers with a basic tax rate than three years ago, 41% more taxpayers with a higher tax rate and 99% more taxpayers with an additional tax rate.
The Institute of Fiscal Studies estimates that a fifth of us will be paying 40% tax at the end of the tax freeze.
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It’s worth highlighting that moving to the higher rate means not only higher income tax, but also half of your personal savings allowance. This means that basic rate taxpayers can earn £1,000 in interest before they have to worry about tax, while higher rate taxpayers can only earn £500 before tax is due, and for additional rate taxpayers, tax kicks in from the first pound of interest.
This means it’s still up to you to do what you can to reduce your own tax bill. This could be through tax-efficient saving and investing in pensions and ISAs, taking advantage of all possible tax relief for things like charitable donations, or considering how you and your spouse hold your savings and investments.
Because even though everyone is talking about tax cuts at the beginning of 2024, you may have to take action yourself if you really want to pay less taxes in 2024.
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