Average household unlikely to save £900 per year under Zahawi’s plan to cut income tax

“Today, I can announce that, as Prime Minister, I will cut the base rate of income tax to 19p in 2023 and 18p in 2024. That will give households back £900 a year on average.”

Chancellor of the Exchequer Nadhim Zahawi, who prior to his elimination from the contest was running for the Conservative leadership, pledged to reduce the basic rate of income tax from 20p to 19p in 2023, and 18p in 2024, if he became Prime Minister.

At an event organised by Conservative Way Forward on 11 July, Mr Zahawi claimed that these changes would “give households back £900 a year on average”. He’s also made the same claim on Twitter.

Mr Zahawi doesn’t appear to have publicly explained how this £900 saving was calculated. Full Fact contacted his office to ask how he reached the figure, but we’vehave had no response.However based on the available data and analysis from economics experts, it appears to be a significant overestimate. 

According to Jonathan Portes, Professor of Economics at King’s College London, cutting income tax by 2p, at an estimated cost of £12.8 billion to the Treasury, would save each of the 28 million households in the UK closer to £450 per year on average. 

Adam Corlett, principal economist at the Resolution Foundation think tank, has also tweeted that the “2p basic rate cut is worth more like £450 per household on average (though very skewed towards higher income households)”.

This is an estimate for the tax savings once the 2p cut is in force. The average household tax savings over the next two years, with only a 1p cut being in force during the first year, would be lower still.   

What other estimates are there?

Because Mr Zahawi hasn’t explained his calculation, we don’t know for sure how he was defining a “household”—and looking at different definitions would produce different estimates. For example, not all households pay income tax, but even if the savings were averaged out over those that do, it would still fall well short of £900. 

According to an ad-hoc analysis produced in 2019 by the Office for National Statistics (ONS), around 76% of households paid income tax. If that percentage still broadly applies today, then there are around 22 million households which pay income tax, and each household would stand to save an average of £600 per year once the 2p cut is in effect.  

While income tax is not solely paid by workers (for example, income tax is charged on pensions), it’s also worth noting that Mr Zahawi’s claim doesn’t appear to be correct for workers specifically, if that was what he was referring to. 

According to the ONS, the average non-retired household earned £49,755 from pre-tax wages and salaries in 2021.

Hypothetically, were this income to be earned by just one person in every household, the changes proposed by Mr Zahawi would save an average of £558 between 2023 and 2024, or £744 from when the 2p reduction comes into force. However, of course in many cases there is more than one earner in a household. Split between two people, as is more likely, the changes would save an average non-retired household less still, though this may be counterbalanced somewhat if non-working households were excluded.

In order to save £900 as the Chancellor claims, a household would need to have two employees earning a combined salary significantly higher than the current average non-retired household salary.

For example, a household containing two people earning £42,571 each would save £900 per year on average over the next two years, while a household with two people earning £35,071 each would save £900 per year once the 2p reduction came into effect.

Finally, with all of these estimates of how much households might save as a result of income tax reductions, we have not taken into consideration indirect impacts on benefits which may cancel out some of the saving.

For example, if a 2p income tax cut was introduced, this may increase the net earnings of some households on Universal Credit, but that would, in turn, reduce the amount of Universal Credit they would be entitled to.

Image courtesy of Richard Townshend