A 1.25% rise in National Insurance will be reversed from 6 November and the government will axe a planned tax rise to fund health and social care.
The NI rise was introduced in April under former chancellor Rishi Sunak, but during the Tory leadership race Liz Truss pledged to change it.
New chancellor Kwasi Kwarteng made the announcement ahead of a “mini-budget” on Friday.
He said the government would also cancel a separate tax, the Health and Social Care Levy, which was due to come into force in April 2023 and scrap a planned increase to dividend tax rates.
Ahead of his mini-budget on Friday, he 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 1.25% increase in national insurance was announced by former chancellor Rishi Sunak to help fund health and social care.
Speaking about the announcement, Matt McDonald, partner and employment specialist at law firm, Shakespeare Martineau, said: “This is unlikely to be a quick and seamless reversal for employers. The extra administrative burden needed to implement change of this nature will put extra pressure on businesses and stretch HR departments.
“Although in theory, employees and businesses owners should feel the effects as soon as November, the reality could be quite different. It’s argued that this plan will only marginally benefit a small number of lower earning households; Liz Truss recently admitted that some of her planned tax cuts will benefit higher earners more than lower earners. Meanwhile SMEs in particular, who are already feeling the mounting pressure of an energy price spike, cost of living crisis and a looming recession, continue in general to struggle more than their larger counterparts.
“A lag between this announcement and having the appropriate software in place is inevitable, although there is at least a window before the introduction of the change on 6 November. More specific details are needed in order for software designers to build tools to help implement and manage the changes and to allow HR professionals to prepare appropriately.
“With already limited time to do so, businesses should act now to get the correct payroll system in place, to reduce the amount of human input required to roll-out the changes and to limit any administrative and potential financial worries.”