Changes to income tax from April 2023
27 September 2022
The announcement from Kwasi Kwarteng which has been referred to as the ‘rabbit in a hat’ revelation was the abolition of the additional rate of tax of 45%, from April 2023. This was then followed by the news that the basic rate of income tax would be reduced from 20% to 19% from April 2023. This means the change will be implemented a year earlier than promised by previous chancellor of the Exchequer, Rishi Sunak, in his spring statement, in which he pledged to do this by April 2024.
Once the additional rate of tax is removed, there will no longer be a rate of tax of 45% placed on annual income above £150,000. Therefore, all annual income above £50,270 will be taxed at the higher rate of income tax (40%). According to the Growth Plan documents, this will cut tax for approximately 660,000 individuals from April 2023. The change will apply to the main rates which apply to:
- non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland
- the savings rates applicable to savings income for taxpayers across the UK
- the default additional rate applicable to non-savings and non-dividend income of any taxpayer not subject to either the main rates or the Scottish rates of income tax.
Even though the basic rate of tax is reducing to 19% from April 2023, there will be a four-year transition period for Gift Aid relief, to maintain the income tax basic rate relief at 20%, until April 2027. There will also be a one-year transitional period for relief at source pension schemes to allow them to continue to claim tax relief at 20%. The cut to the basic rate of income tax will apply to:
- non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland
- the savings basic rate which applies to savings income for taxpayers across the UK
- the default basic rate, which applies to non-savings and non-dividend income of any taxpayer not subject to either the main rates or the Scottish rates of income tax.
It’s of note that the rates and bands for Scottish income taxpayers for non-savings, non-dividend income are set by the Scottish government, so the income tax rate cuts announced do not apply to Scottish taxpayers. Additionally, the Welsh rates of income tax for non-savings, non-dividend income for Welsh taxpayers are set by the Welsh government, on top of reduced UK rates. The income tax rate cuts apply to Welsh taxpayers, but don’t provide additional funding for the Welsh government.
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