How much you pay in all salary bands and the UK’s basic rate tax explained

The mini-Budget delivered by Chancellor Kwasi Kwarteng on Friday morning outlined a series of tax cuts and other economic measures.

Among the changes was a cut to the basic rate of income tax from 20p in the pound to 19p.

It will take effect in April 2023 – brought forward 12 months earlier than planned.

The Government will also scrap the 45 per cent top rate of income tax for high earners, replacing it with a 40 per cent rate in a bid to simplify the tax system and make the UK more competitive, the Chancellor said.

Here is what it means for you.

What is income tax?

This is the tax you pay on your income, although you do not have to pay tax on all types of income and some income is tax-free.

The amount you pay each tax year depends on:

  • how much of your income is above your Personal Allowance
  • how much of your income falls within each tax band

The standard Personal Allowance is £12,570. This is the amount of income you don’t have to pay tax on.

Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is more than £100,000, the government says.

The current tax year is from 6 April 2022 to 5 April 2023.

What do you pay income tax on?

You pay tax on things like:

  • money you earn from employment
  • profits you make if you’re self-employed
  • some state benefits
  • most pensions, including state pensions, company and personal pensions and retirement annuities
  • rental income (unless you’re a live-in landlord and get less than the rent-a-room limit)
  • benefits you get from your job
  • income from a trust
  • interest on savings over your savings allowance

You don’t pay tax on things like:

More on Income Tax

What are the different income tax bands?

Income tax bands are different if you live in Scotland.

At present, the tax rates you pay in each band if you have a standard Personal Allowance of £12,570 are:

  • The basic rate of tax which applies to £12,571 to £50,270 is 20 per cent
  • The higher rate of tax which applies to £50,271 to £150,000 is 40 per cent
  • The additional rate of tax which applies to over £150,000 is currently 45 per cent

This additional 45 per cent rate will be abolished from April 2023 and there will only be a single higher rate of income tax of 40 per cent, Mr Kwarteng announced, although this does not apply to Scotland.

From 6 April 2023 the highest tax bracket will be the 40 per cent rate, which is paid on all earnings over £50,271.

This plan had already been announced by the previous chancellor, Rishi Sunak, but was due to take effect in 2024.

The new measures mean that on all earnings between £12,571 and £50,270, people will only have to pay 19 per cent income tax, rather than the current 20 per cent.

The Treasury said that the move will mean “31 million people will benefit from the policy in 2023-24, with an average gain of £170.”

On average, basic-rate taxpayers will be £130 better off in 2023-24 with higher-rate taxpayers gaining £360, according to the Treasury.

It added this tax cut is worth more than £5 billion.

What has the Chancellor said about the change in income tax?

The Chancellor told MPs: “The additional rate of income tax at 45 per cent is currently higher than the headline top rate at G7 countries like the US and Italy, and it is even higher than social democracies like Norway.

“But I am not going to cut the additional rate of tax today, Mr Speaker, I am going to abolish it altogether. From April 2023, we will have a single higher rate of income tax of 40 per cent.

“This will simplify the tax system and make Britain more competitive and will reward enterprise and work. It will incentivise growth; it will benefit the whole economy and the whole country.”

What has been the reaction to the cut in income tax for high earners?

Torsten Bell from think tank the Resolution Foundation said: “What we know is that the tax cuts will disproportionately benefit those on the highest incomes.”

Almost half of the gains from tax cuts next year go to the richest 5 per cent of households. The poorest half get an average of £230 vs £3,090 for richest fifth, he said.

Labour’s Shadow Chancellor Rachel Reeves said it was a plan “to reward the already wealthy” and would not help those struggling most with rising prices.

Writing in the i Labour MP and former shadow chancellor John McDonnell criticised the mini-Budget.

“Its central thesis, that if you cut taxes for the rich and corporations somehow this wealth will trickle down to even the poorest in society, has never been seen to work,” he wrote.

“In fact, the reverse has been demonstrated; that inequality increases as wealth rushes upwards.”

What else was in the mini-Budget?

As well as the changes to income tax Mr Kwarteng announced:

  • The threshold before stamp duty is paid in England and Northern Ireland has been raised to £250,000 – for first-time buyers it’s £425,000
  • The cap on bankers’ bonuses has been lifted
  • A planned rise in corporation tax has been scrapped
  • An increase in National Insurance has been reversed
  • Low-tax investment zones will be set up across the UK

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