The increase in National Insurance (NI) introduced by Boris Johnson will be reversed from Nov 6, Kwasi Kwarteng announced on Thursday.
Speaking ahead of his mini-Budget on Friday, the Chancellor confirmed that he was cancelling the 1.25 percentage point increase imposed by Rishi Sunak, his predecessor, to pay for social care and help tackle the NHS backlog.
Mr Kwarteng also said he would be scrapping the planned health and social care levy, due to come into effect in April to replace the NI rise. The Government tabled legislation in the Commons on Thursday to enact the tax changes.
The Treasury said the U-turn would reduce tax for 920,000 businesses by nearly £10,000 on average next year because they will no longer pay a higher level of employer NI. It will also save householders an average of around £135 this year.
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.
“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.”
The Treasury said most employees would 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.
The levy was expected to raise around £13 billion a year, and Mr Kwarteng said funding for health and social care services would be maintained at the same level as if it was still in place.
The Chancellor and Liz Truss, the Prime Minister, have argued that the lost revenues will be recovered through higher economic growth stimulated by the tax cuts.
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. 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”.
The Chancellor is also set to confirm on Friday that the increases to dividend tax rates will be scrapped from April.
The increased dividend tax was introduced this year to ensure those who gained income from dividends contributed the same amount to help fund health and social care.
The Treasury said the NI cut would be worth £4,200 on average for small businesses and £21,700 for medium-sized firms. In total, 905,000 micro, small and medium businesses will benefit from 2023-24.
NI thresholds were increased in July this year to lift 2.2 million of the poorest people out of paying the tax. The Chancellor has committed to retaining the level of these thresholds to support families. Taken together, the higher thresholds and the levy reversal mean almost 30 million people will be better off by an average of over £500 in 2023-24.
Kitty Ussher, the chief economist at the Institute of Directors, an industry body, said raising employers’ NI had been “a mistake”, adding: “This was quite simply a tax on jobs, which businesses had to pay regardless of whether they are profitable.
“Many of our members told us that the impact of the increase was that they would have no choice but to push up prices, making inflation even worse.”