The amount you can earn before having to pay national insurance (NI) has been raised from today, a move Boris Johnson has described as the “biggest tax cut in a decade” to help with the rising cost of living.
The government says 30 million people will benefit to the tune of £6bn collectively from the shift in the threshold, which has risen from £9,880 to £12,570.
It would save a typical worker £330 over 12 months and take 2.2 million people out of paying NI contributions altogether.
The PM told his cabinet on Tuesday – just hours before the shock resignations of Sajid Javid and chancellor Rishi Sunak – that the measure was part of a £37bn package of support the government had put in place to help families face down the rising tide of everyday expenses from fuel and food to household energy.
How does the NI change affect you?
The rate of inflation has hit levels not seen for 40 years – and is set to surge further later this year when the energy price cap is raised again, potentially adding £1,000 more to the average annual bill.
The NI threshold shift follows a controversial 1.25 percentage point increase in NI in April.
That was brought in by Rishi Sunak, despite intense pressure to postpone the hike, to help pay for investment in health and social care.
Personal finance experts say that a £27.50 boost to the average pay packet per month will do little to compensate workers as wages rise at a rate well below the 9% inflation rate.
Commentators have also recently highlighted how income tax thresholds, frozen until 2026, are pushing more people into paying higher tax bills.
Figures released by HM Revenue and Customs last week showed nearly two million higher and additional rate taxpayers had been created in the space of three years.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Unfortunately, as time goes on, the tax burden is going to grow.
“The frozen tax thresholds until 2026 mean that as wages gradually increase, the taxman is (syphoning) off more and more of your cash.”
Ms Coles added: “Any saving will be welcome right now, but it’s going to be a drop in the ocean.
“Someone paying £10 or £20 less in tax each month isn’t going to notice once they’ve factored in the rising cost of everything from energy to food and fuel.”
Further support for households is on the horizon.
More than eight million households will start to see cost-of-living payments hit their bank accounts next week, with a first instalment of £326 paid from 14 July to all low-income households on benefits.
The second tranche of the £650 payment is due to follow in the autumn while pensioners and those on disability benefits will also receive support.
From October, all households will have £400 taken off energy bills – in the form of a grant rather than a loan – no matter what they earn.