Chancellor Jeremy Hunt announced a two percentage point cut to National Insurance in his Autumn Statement, but said it would not affect NHS funding.
The move would mean lower tax for more than 29 million people, who on average will save more than £450 in their tax payments each year, he said.
However, with the rising cost of living and income tax thresholds remaining frozen, the measure has been branded “a drop in the ocean“.
The main rate of Class 1 employee National Insurance Contributions (NICs) will be cut from 12% to 10% from 6 January 2024, with employees benefitting from January onwards.
“This will reward work and sustainably grow the economy, providing a combined rate of income tax and NICs for an employee paying the basic rate of tax of 30% – the lowest since the 1980s,” Hunt said in his speech.
“If we want people to get up early in the morning, if we want them 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 us so today I’m going to cut the main 12% rate of employee National Insurance,” Hunt said.
“If I cut it by one percentage point to 11%, that would be an extra £225 in the pockets of the average work every year but instead I’m going to go further and cut the main rate of employee National Insurance by two percentage points.
“It means someone on the average salary of £35,000 will save over £450.”
But he noted that the move would not adversely affect the NHS.
“Cutting National Insurance will not lead to any change in NHS funding or pension payments.
“Services will remain unchanged and continue to be funded as they are now.”
The NHS is currently facing a waiting list of more than 7.77 million people, expected to increase to eight million people next year.
Hunt said: “I would normally bring in a measure like this at the start of the new tax year in April but instead tomorrow I’m issuing urgent legislation to bring it in on January 6th so people can see the benefit in their payslips at the start of the new year.”
Clare Moffat, pensions and tax expert at Royal London said: “Ultimately, National Insurance is another tax to be paid, so any saving is a good one.
“While some will benefit from this reduction, we need to remember that leaving personal allowances and income tax thresholds frozen means some will end up paying tax when they weren’t before.
“While our research shows that the average household is paying nearly £500 a month more on household bills and food costs this year, a cut of 2% is a drop in the ocean.
“Any National Insurance reduction will only help those who are working and those under State Pension age.”
Social Market Foundation senior researcher Sam Robinson added: “Today’s cuts to National Insurance rates barely touch the sides of the tax increase from frozen thresholds, meaning they aren’t really a ‘cut’ at all for many households.
“But these changes do represent a welcome rebalancing of personal taxes, shifting away from national insurance towards income tax, which covers a broader range of earnings including pensions and rental income.”