The National Insurance (NI) increase came into effect in April 2022, taking the rate from 12% to 13.25% to fund social care in the UK.

Its introduction breaks a Tory manifesto pledge and now, new Chancellor Kwasi Kwarteng has confirmed the increase would be reversed from 6 November.

The move was widely predicted as during her leadership campaign, Liz Truss was clear about her tax-cutting mission. And now as Prime Minister, she’s pledged to “slash tax to help drive growth”.

Calculations reveal someone earning £30,000 a year will pay £18.15 less NI per month following the reversal.

Further, the planned Health and Social Care Levy – a separate tax due to come into force in April 2023 to replace this year’s NI rise – has also been scrapped.

The levy was predicted to raise £13bn for health and social care, but the Chancellor confirmed that funding would be maintained at the “same level as if the levy was in place”.

The treasury added this would help 28 million people across the UK retain more of their savings, with £330 on average expected to be saved in 2023 and 2024 with an additional saving of £135 on average this year.

Kwarteng also confirmed he would retain the NI threshold increase in July 2022 to lift 2.2 million of the poorest people in the UK out of paying tax.

“Taken together, the higher thresholds and the levy reversal mean that almost 30 million people will be better off by an average of over £500 in 2023-24”, the Treasury noted.

‘Greater impact on higher earners’

Shaun Moore, tax and financial planning expert at Quilter, said: “The Tory U-turn means people will be in an even better position than when the policy was first announced, as Sunak had already caved to pressure and increased the primary threshold for paying NI – and that remains in place.

“The 1.25% reduction means that someone earning £50,000 a year would see an extra £40 in their pocket each month, equating to £467 extra annually. Whereas the average graduate earning £27,000 would see a miserly £15 extra a month or £180 a year. Reversing the NI hike has a much greater impact on someone earning £100,000, who would save £91 monthly or £1,092 annually.

“The social care levy was also due to apply to pensioners from next year, the NI reversal will save them 1.25% of applicable earnings from 2023.”

Moore added: “Axing this additional 1.25 percentage points of NI contributions will provide a boost for consumers but leaves a gaping hole in Treasury funding plans for social care. Kwarteng says overall funding for health and social care services will be maintained at the same level as if the Levy were in place and come from general taxation. This sounds like wishful thinking and is effectively taking a gamble with social care funding in the hope the tax take increases due to greater economic activity. Let’s hope tomorrow’s ‘mini budget’ reveals more about how the Chancellor plans to raise the much-needed funds for social care.”

National Insurance reversal impact on businesses

The Treasury noted that scrapping the NI increase would cut tax for 920,000 businesses by around £10,000 on average next year. For small and medium-sized businesses the average saving is pegged at £4,200 and £21,700 respectively in 2023 and 2024.

It added that around 60% of the businesses would see a fall in the NI tax and 20,000 would no longer have to pay National Insurance due to the Employment Allowance which rose in April 2022 from £4,000 to £5,000.

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.

“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.”

As part of its cancellation the Chancellor is expected to confirm increases to dividend taxes will be scrapped in his mini-budget tomorrow.