Numbers from the Office for Budget Responsibility show that the proceeds of fiscal drag, where pay rises see more workers enter higher tax brackets — will raise an additional £44.6bn by 2028-29.
For those with the patience to wade through the data, it’s on page 69 of yesterday’s forecast.
This is an enormous amount; enough to cover more than 60 per cent of the total cost of the pandemic-era furlough scheme. For perspective, the 2 per cent national insurance cut (heralded as a boost for 27mn people) will cost the government just £10bn per year.
The OBR also notes that ‘the overall 3.5 per cent peak-to-trough drop in Real Household Disposable Income per person between 2019-20 to 2024-25 is still the largest reduction in real living standards since ONS records began in the 1950s.’
And worse, the data indicates that tax as a percentage of UK GDP will still hit a post-war high of 37.7 per cent in 2028-29 — the same prediction the body made in March 2023.
The man on the Clapham Omnibus
But what does all this mean for your personal finances? The implication of the macroeconomic overview is that workers will be worse off over the longer term — but is this the case?
If you are an employee, the base calculation is rather simple: higher-rate payers have it easy as they will, in theory, retain a flat additional £754 each year.
Basic ratepayers need to do a little maths, but should be able to use a recent payslip to calculate the difference. NI is being cut from 12 per cent to
10 per cent.
Of course, those on universal credit or similar need to remember this additional income will see their entitlement reduce, but you should still be up in nominal terms.
Now for a specific example. Let’s take a full-time employee, with no student loan, earning £35,000 this year - which is pretty much exactly the median wage.
Currently, they see £4,486.00 in income tax and £2,579.45 in NI deducted from their salary representing 20.2 per cent of their gross income, leaving them
with £27,934.55 in disposable income.
Let’s say that over the next year, they have secured the 7.7 per cent average annual increase (ONS figures for regular pay, excluding bonuses, July-September 2023).
Now earning £37,450 a year, and no doubt feeling very pleased with themselves, their income tax will come in at £4,976.00 and NI at £2,488.00 representing 20 per cent of their income, leaving them with £29,986.00 in disposable income.
This leaves our typical worker £2,051.45 better off in terms of disposable income. Or in other words, their take home pay has risen by approximately 7.3 per cent.
But if we assume the average pay rise, we also need to consider the current inflation rate at 4.6 per cent, then our typical worker is then only 2.7 per cent better off.
