Personal Income Tax

In March 2022, Rishi Sunak announced his intention to cut the basic rate of income tax from 20% to 19% from 6 April 2024. This was costed at over £5 billion a year and was said to be conditional on the government continuing to meet its ‘fiscal rules’ – borrowing going down and not being required for day-to-day spending. Kwasi Kwarteng has brought the cut forward by a year to 6 April 2023, with no conditions attached. For someone earning over the 40% threshold of £50,270, this will mean a reduction in income tax of £377 in 2023/24.

The Chancellor also announced that the 45% rate of tax that applies to income above £150,000 a year will be abolished from 6 April 2023, leaving only the basic rate of 19% and the higher rate of 40%. The additional rate was introduced at 50% by the Labour government in 2010 shortly before it lost the general election of that year, and was cut to 45% in April 2013. The cost of this tax cut is estimated at about £2 billion a year.

These cuts will not automatically apply in Scotland, where tax rates on non-savings, non-dividend income are set by the Scottish Parliament. The Scottish Government will receive additional funding in respect of the basic rate tax reduction and take its own decision whether to pass it on to taxpayers by reducing rates.

The Welsh Assembly also has the right to set its own tax rates for non-savings, non-dividend income, but has so far kept to the main UK rates.

Charities

Reductions in the basic rate of tax are not generally favourable to charities, because they depend on claiming back basic rate tax paid by donors under Gift Aid. If the donor gives the same net amount, the charity is entitled to a smaller tax credit. The current rate of tax credit will be maintained for four years, until April 2027, to reduce the impact on the income of charities.

Dividend income

For the tax year 2022/23, the tax rates on dividend income over £2,000 were increased to correspond to the increases in National Insurance Contributions and the planned Health and Social Care Levy. The ordinary rate, paid by basic rate taxpayers, rose from 7.5% to 8.75%; the upper rate (for higher rate taxpayers) is 33.75% (from 32.5%) and the additional rate (for those with income above £150,000 a year) is 39.35% (from 38.1%). These rates apply across the UK.

These increases will be reversed with effect from April 2023. Combined with the abolition of the additional rate of income tax, this means that there will only be rates of 7.5% and 32.5% on dividend income above £2,000 in 2023/24. This tax cut costs an estimated £1 billion a year, and is estimated to benefit 2.6 million taxpayers by an average of £345 in 2023/24.

Frozen allowances

Contrary to some expectations, no announcements were made about the possible unfreezing of the income tax rate bands and the main allowances. Chancellor Sunak fixed them at their 2021/22 levels until the end of 2025/26, instead of the usual inflation-linked increases each year. Although this means that someone with the same income will pay the same tax year on year (apart from the cuts mentioned above), the effect of inflation on salaries and business profits means that this will represent a significant tax increase over the period. Based on estimates made in March 2021, government receipts for 2025/26 were forecast to rise by £8 billion because of this. The significant increases in inflation since then suggest that the effect of freezing will be substantially higher.

Two other thresholds remain fixed as they have been since they were introduced: the income levels at which the High Income Child Benefit Charge begins to claw back Child Benefit receipts (£50,000 since 2012/13) and at which tax-free personal allowances are withdrawn (£100,000 since 2010/11). These measures create a higher marginal tax rate in the income bands £50,000 – £60,000 (for those in receipt of Child Benefit) and £100,000 – £125,140 (as the personal allowance is reduced to nil). Inflation brings more people each year within these charges.