National Insurance increase to be scrapped, chancellor confirms ahead of mini-budget

Chancellor Kwasi Kwarteng is set to deliver his mini-budget tomorrow. Credit: PA

Chancellor Kwasi Kwarteng has confirmed the National Insurance increase, which came into effect in April, will be reversed from November 6.

The 1.25 percentage point rise was announced by his predecessor Rishi Sunak to help fund health and social care.

But his Tory leadership rival Liz Truss made it quite clear she wanted to do away with the hike if she became prime minister.

Having entered office two weeks ago at a time of spiralling inflation, her new chancellor will unveil an emergency mini-budget tomorrow to help households and businesses get through a difficult winter.

Today Mr Kwarteng said: "Taxing our way to prosperity has never worked. To raise living standards for all, we need to be unapologetic about growing our economy.

Prime Minister Liz Truss Credit: Toby Melville/PA

“Cutting tax is crucial to this – and whether businesses reinvest freed-up cash into new machinery, lower prices on shop floors or increased staff wages, the reversal of the levy will help them grow, whilst also allowing the British public to keep more of what they earn.”

It comes as the Bank of England raises interest rates to 2.25% from 1.75% - the highest rate-level since the 2008 financial crisis.

In a tweet that appears to pre-empt Friday’s mini-budget, he said: “I can confirm that this year’s 1.25% point rise in National Insurance will be reversed on 6th November. “Its replacement – the Health and Social Care Levy planned for April 23 – will be cancelled. A tax cut for workers. More cash for businesses to invest, employ and grow.”

The Treasury said most employees will receive a cut to their national insurance contribution directly via their employer’s payroll in their November pay, although some may be delayed to December or January.

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The levy was expected to raise around £13 billion a year to fund social care and deal with the NHS backlog which has built up due to the Covid pandemic.

However Mr Kwarteng said funding for health and social care services will be maintained at the same level as if it was still in place.

A No 10 spokeswoman said the Health and Social Care Levy (Repeal) Bill was part of the Government’s commitment to “a low tax, high growth” economy.

She added: “This is delivering on a commitment the PM made on the (Tory leadership) campaign trail.”

The chancellor and Ms Truss have argued that the lost revenues will be recovered through higher economic growth stimulated by the cuts in taxation.

But with Mr Kwarteng also preparing to scrap a planned rise in corporation tax, some economists have warned about the sharp rise in Government borrowing.

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The Institute for Fiscal Studies said the plan to drive growth was “a gamble at best” and that ministers risked putting the public finances on an “unsustainable path”.

Most people will be worse off in real terms this year despite the package of Government support to deal with the cost-of-living crisis, the Institute for Fiscal Studies (IFS) has warned. In an online presentation ahead of Mr Kwarteng’s “fiscal statement” on Friday, IFS researcher Xiaowei Xu said soaring inflation meant people across the income spectrum will see a hit to their living standards.

“In real terms we expect the median earner to be £500 worse off than they were last year, which is around a 3% net cut in their income,” she said. “High earners – but not very higher earners – will be more than £1,000 worse off which would be a larger increase in percentage terms. Lower earners and those out of work will be more shielded from the rising cost of living, both in cash terms and as a share of income.

“Even after the Government is spending vast amounts of money to protect households from the rising cost of living, most households would still see their living standards fall this year compared to last year.”

Responding to the chancellor's announcement, Karl Handscomb, Senior Economist at the Resolution Foundation, said: "While raising National Insurance was a flawed way to fund social care provision that would initially largely benefit non-National Insurance payers, cutting NICs is an equally flawed way to tackle Britain’s cost-of-living crisis that is hitting lower-income households the hardest.

"This policy will give away most to those who need the least support. The poorest tenth of households will gain just £11.50 this year, while the top 10 per cent on average gain 60 times that amount.

"Twice as much of the permanent gains will go to the richest 5 per cent of households as the entire bottom half of the income distribution."

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The Chancellor is reportedly preparing to announce in tomorrow's mini-budget that 120,000 claimants in part-time work could face a cut in their benefits if they don't take active steps to find more work.

Asked on LBC about the proposal, deputy prime minister Thérèse Coffey said ministers were determined to drive economic growth including by getting more people working. “That is including getting more people … working in many unfilled vacancies as well as people doing a very limited amount of work today,” she said. “That is why we continue to extend the number of people who are currently on benefits about how we can help them find perhaps higher-paid work or about taking up more hours. “This is a combined approach in order to recognise that we want to improve the lives and prosperity of people in this country.”