Chancellor Jeremy Hunt announced a bigger-than-expected cut to National Insurance in his Autumn Statement.
The main rate will fall from 12% to 10% from January – although previous tax changes mean many workers will not be much better off.
Mr Hunt also increased the state pension by 8.5% from April and said universal credit would rise by 6.7%.
The UK is forecast to narrowly avoid recession this year, but growth forecasts have been sharply downgraded.
Mr Hunt used his hour-long speech to the House of Commons to claim the government had “got the economy back on track” by halving inflation – the rate at which prices rise – and reducing borrowing.
This meant he had room – within the government’s self-imposed rules – to cut taxes to boost economic growth as he prepared the ground for next year’s general election campaign.
He confirmed that a tax break for companies investing in new equipment would be made permanent, which he claimed was the “biggest business tax cut in modern history”.
But the percentage of the nation’s income paid in tax is still set to rise to its highest level in 70 years, according to the Office for Budget Responsibility (OBR).
The OBR also slashed its growth forecasts for the next two years, to 0.7% in 2024 and 1.4% in 2025 – and said living standards would not return to pre-pandemic levels until 2027/28.
The reason for this, the watchdog added, is that inflation is expected to be “higher for longer”, returning to its 2% target in 2025, a year later than forecast in March.
Interest rates will also be higher for longer, according to the OBR report. House prices will rise by 0.9% in 2023 and then fall by 4.7% in 2024, it adds.
“Maybe these aren’t the headline taxes, but they will help grow the economy and grow people’s wages and that’s how we improve living standards for families up and down the country,” he added.
He said the OBR’s downgraded growth forecasts were still a “big improvement” on a year ago.
Other announcements in the Autumn Statement include
Benefit cuts for unemployed and disabled people deemed not to be doing enough to find work.
The minimum wage will rise by more than a pound to £11.44 an hour from April next year.
A freeze on alcohol duty until August next year, with no increase in duty on beer, cider, wine or spirits.
Tobacco duty to rise by 2% above inflation, with the duty on hand-rolling tobacco rising by an additional 10% above inflation.
Freezing Local Housing Allowance to help people pay rising rents
Extending the 75% business rates discount for pubs, restaurants and leisure businesses for another year.
Mr Hunt said he had set out “110 growth measures”, including £500m for artificial intelligence research, plans for more generous tax breaks for TV and film production, and £4.5bn over five years to attract investment in key manufacturing industries.
He also stuck to the government’s ‘triple lock’ pension guarantee, increasing it in line with average earnings. This means someone on the full state pension will get just over £17 a week more.
But the centrepiece of Mr Hunt’s statement was the two percentage point cut in national insurance, which will apply across the UK.
The Chancellor said the cut – which was twice as large as expected – would help 27 million people and ‘means someone on an average salary of £35,000 will save over £450 a year’.
He also abolished Class 2 National Insurance – a £3.45 a week tax on the profits of two million self-employed people.
But Mr Hunt’s decision last year to freeze the level of income at which workers start paying National Insurance means millions will be dragged into higher rates or forced to pay the tax for the first time.
Labour’s shadow chancellor Rachel Reeves said: “Today’s 2p cut will not remotely compensate for the tax [rises] already introduced by this Conservative government.
“The fact is that taxes will be higher at the next election than they were at the last.”
She added: “What has been laid bare today is the full extent of the damage this government has done to our economy over 13 years.”
Conservative MP Kwasi Kwarteng – who was forced to resign as chancellor after his tax-cutting plans sparked a backlash from financial markets – said Mr Hunt’s statement was “a tentative step in the right direction” that would be welcomed by “core Conservative voters”.
Writing in The Telegraph, he said: “Of course I would have liked to see more tax cuts, but I fully understand why Mr Sunak and Mr Hunt are taking a cautious approach, given my own experience last year.”
For the SNP, business spokesman Drew Hendry said: “The Chancellor would like you to think he’s pulled a rabbit out of the hat today, but in fact he’s just pulled the wool over a lot of people’s eyes.
“Things are still getting worse for people. Inflation is still more than double where it should be and that means prices and costs for people in their homes are still going up every day.”
The Liberal Democrats also accused Mr Hunt of “deception” and the government of being “out of touch and out of ideas”.
The party’s Treasury spokeswoman Sarah Olney said: “The Conservatives’ chaos has sent mortgages and tax bills through the roof, today’s announcements don’t even touch the edges.”
