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Mini-Budget 2022: The Growth Plan – Income Tax Changes

Income tax was today reduced as part of 'The Growth Plan'

23 Sep 2022

Income tax was today reduced as part of Kwasi Kwarteng’s first budget, The Growth Plan. Some changes had been already speculated or promised by Liz Truss in the days leading up to this ‘mini-budget’ and some were more controversial. Kwarteng claimed he wanted people to keep more of the money they earn.

Basic rate tax rate cut to 19% from April 2023

The reduction in the basic rate tax band was already announced by Rishi Sunak, from its current level of 20% to 19% but it had been announced to be coming into force from April 2024, meaning tax payers had over 18 months more at the current 20% rate before benefiting.

Today Kwarteng has brought forward that tax cut, to come into force from April 2023, with taxpayers saving up to £377 a year as a result.

Additional rate of 45% tax scrapped

To incentivise enterprise and hard work and to simplify the tax system, the Chancellor announced that the additional rate of tax will be scrapped so that there is now only one higher rate of tax at 40%. This change will be effective from 6 April 2023.

The dividend additional rate will also be removed to align with the dividend upper rate, which is being reduced to 32.5% from 6 April 2023.

The existing rate of 45%, which applies to income above £150,000, is higher than the headline G7 rate which includes countries such as the US and Italy and higher than the rates of a number of social democracies including Norway.

Additional rate taxpayers were also previously prevented from benefitting from the £500 Personal Savings Allowance that higher rate taxpayers could utilise, which they will now be able to use.

Examples of savings achieved

Let’s assume Jane Smith earns £150,000 a year salary. No other income.

For 2022/23 she will have an income tax bill of £52,460 and for 2023/24 she will pay only £52,083, saving £377 from the basic rate band reduction.

Let’s also assume John Smith earns £300,000 a year salary with no other income.

For 2022/23 he has an income tax bill of £119,960, but for 2023/24 he will save a massive £7,877 and pay only £112,083, being £377 saving from the reduction in basic rate band, and £7,500 saving from reducing the additional rate from 45% to 40%.

There were also national insurance savings that Jane and John will benefit from in addition to the income tax savings being made.

Why huge reductions for higher tax payers?

Many people will speculate that the Chancellor has got it all wrong and that he is helping the richer people of the population rather than those who are struggling. Whilst he has introduced some measures that help lower income families, his budget is clearly very much about growth and trying to help the UK economy to recover.

The UK needs high earners to stay within the UK tax net where it can collect taxes, and for those businesses and individuals to invest in the UK economy to produce growth. When the tax bill gets too ugly people will go to great lengths to reduce that tax bill including moving themselves, their investments or even their businesses abroad. The intention by reducing the top rates, like scrapping the additional rate of income tax, is to attract higher earners to stay or come to the UK.

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