Jeremy Hunt cuts National Insurance bills as growth hits 'dead end'

Unlike income tax, which is largely devolved to Holyrood, National Insurance is reserved to Westminster and so the cut will apply across the UK, including 2.4m workers in Scotland.

Mr Hunt said the measure, one of 110 aimed at increasing growth in his Autumn Statement, would save someone on £35,000 more than £450 a year on average.

A nurse would save around £520 and a police officer around £630.

However the cut will not offset the income tax rises experienced by many workers, who have been lifted into higher tax brackets on both sides of the border by rising wages.

The phenomenon, known as fiscal drag, follows the freezing of the respective income tax thresholds by both London and Edinburgh.

Announcing the change, Mr Hunt said high employment taxes “disincentivise the hard work we should be encouraging”.

He said: "If we want people to get up early in the morning, if we want people to work nights, if we want an economy where people go the extra mile and work hard, then we need to recognise that their hard work benefits all of us.” 

Paul Johnson, director of the Institute for Fiscal Studies think tank, said: “This undoes only a small fraction of the huge tax increase resulting from the freezing of income tax allowances and thresholds.”

He said that next year the NICs cut “will leave average earners slightly better off” once the freezes in income tax thresholds are accounted for but “low earners and high earners will still be worse off”.

The Office for Budget Responsibility (OBR) also forecast anaemic growth over the next five years, downgrading its March predictions for three of them.

Mr Hunt told the Commons the OBR expected the economy to grow by 0.6% this year, 0.7% next year, then by 1.4% in 2025, 1.9% in 2026, 2% in 2027 and 1.7% in 2028.

He said: “If we want those numbers to be higher, we need higher productivity.”

Citing France and the US as countries where the private sector “invests more”, he said his 110 measures would help close that gap by boosting business investment by £20bn a year.

Mr Hunt also abolished Class 2 NICs paid by the self-employed, saving the average payer £192 a year, while preserving their access to benefits and welfare credits in full.

He cut the rate of Class 4 Nics from 9 to 8%. He said the two changes would save around 2m self-employed people an average of £350 a year from April. 

The Chancellor also raised the state pension in line with the 'triple lock', up  8.5% in line with average earnings, worth up to £900 more a year.

He confirmed plans for a tougher welfare regime, saying it was “wrong economically and wrong morally” that every year more than 100,000 people were signed onto benefits with no requirement to look for work because of sickness or disability.

The Chancellor said: “We will reform the fit note process so that treatment rather than time off work becomes the default."

He said that if people refused mandatory work for six months after 18 months of treatment they would lose their benefits.

The OBR said the tax changes announced by Mr Hunt should reduce the tax burden in the UK by 0.7% of GDP, but it was still forecast to rise in every year to reach a post-war high of 37.7% of GDP by 2028/29.

Rises in income tax “explain most of the increase in this forecast, rising from 10.2% of GDP this year to 11.3% in 2028/29, driven by threshold freezes and strong nominal earnings growth,” the OBR said in its economic and fiscal outlook.

By 2028/29, frozen thresholds will result in nearly 4m additional workers paying income tax, 3m more moved to the higher rate, and 400,000 more paying the additional rate, it said.

Meanwhile, public spending is forecast to fall steadily as a share of GDP from 44.8 to 42.7% of GDP over the forecast period

Responding for Labour in the Commons, shadow chancellor Rachel Reeves said: “Today the chancellor has lifted the lid on 13 years of economic failure.

“The Chancellor claims that the economy has turned a corner, yet the truth is under the Conservatives growth has hit a dead end.

“What has been laid bare today is the full scale of the damage that this Government has done to our economy over 13 years.”

The Scotland Office said the changes announced in the statement would see an extra £545m for Holyrood's budget under the Barnett funding formula over the current financial year and next.

Scottish Secretary Alister Jack said: "

Scottish Secretary Alister Jack said: "This is an Autumn Statement to support hard working families and grow our country's economy.  

"The National Insurance cut and increase in the National Living Wage will mean a pay boost for millions of workers right across Scotland.

"We have honoured the pensions triple lock, meaning pensioners will get a £900 a year increase.

“Vital new support for Scottish businesses will ensure we get growth back into our economy.

“Plus, there will be an additional £545 million in Barnett Consequentials for the Scottish Government, on top of their record block grant.

"There is a lot to cheer about, not least the duty freeze on spirits to support Scotland’s biggest export industry.”

Sean Cockburn, chair of the Chartered Institute of Taxation’s Scottish Technical Committee, said: “This rate cut will apply to taxpayers in Scotland because National Insurance is set on a UK-wide basis.

“As things currently stand, existing income tax divergence means that Scottish taxpayers with income under £27,850 will pay less income tax and National Insurance combined, compared to those with equivalent earnings in the rest of the UK. Above this, they will start to pay more because of the higher rates of Scottish Income Tax that already exist.

“The Chancellor’s announcement has not addressed the specific anomaly that sees Scots with earnings between the Scottish and UK higher rate thresholds pay a higher marginal rate of tax.

“This happens because lower rates of National Insurance are aligned with the UK higher rate threshold for income tax.

"Even with the reduction announced today taken into account, a Scottish taxpayer with earnings between £43,663 and £50,270 will pay a marginal combined rate of 52% on that slice of income, compared to 30% elsewhere in the UK.”

Christine Cairns, tax partner at PwC, added: “The cut to employee NIC functions as a significant and welcome 2% cut to income tax within the band affected.

"Its introduction three quarters of the way through the tax year is an unusual step that will be welcomed by those who benefit although it could cause an administrative headache for payroll operators.

“Notwithstanding the cuts, significantly there were no increases to any tax thresholds, meaning the effects of fiscal drag will continue to bite, offsetting in part the savings achieved."