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Income tax: How will thresholds change and what will I pay? Income tax: How will thresholds change and what will I pay?
(14 days later)
In November, the government announced changes to income tax rules, which means millions of people will end up paying more. Income tax is the government's single biggest source of money.
Income tax is the government's single biggest source of funding. On 6 April the point at which the highest earners start paying the top rate of tax came down, but other thresholds were left unchanged.
This means that millions of people will end up paying more in tax.
Budget 2023: Key points at-a-glance
What the Budget means for you and your money
What is happening to income tax thresholds?What is happening to income tax thresholds?
Chancellor Jeremy Hunt has frozen the income tax personal allowance at £12,570 until April 2028. Chancellor Jeremy Hunt has frozen the income tax personal allowance at £12,570 until April 2028. Basic rate tax payers do not have to pay any tax on income below this level.
He has also frozen the point (threshold) at which people start paying higher tax rates.He has also frozen the point (threshold) at which people start paying higher tax rates.
It means that as wages rise, people pay tax on a larger proportion of their earnings, and more people move into higher tax brackets. It means that as wages rise, people will pay tax on a larger proportion of their earnings, and more people will move into higher tax brackets.
The Office for Budget Responsibility - which independently assesses the government's economic plans - estimated that freezing thresholds until 2028 will create an additional 3.2 million new taxpayers. It said 2.6 million more people would pay higher rate tax. The Office for Budget Responsibility - which independently assesses the government's economic plans - estimates that freezing thresholds until 2028 will create an additional 3.2 million new taxpayers.
Mr Hunt also announced that on 6 April 2023, the threshold when the highest earners start paying the top rate of tax will fall from £150,000 to £125,140. It says 2.6 million more people will pay higher rate tax.
The freezes are expected to raise £25.5bn more a year by 2027-28, than if the thresholds had increased in line with the CPI measure of inflation.
Income tax rates, thresholds and personal allowancesIncome tax rates, thresholds and personal allowances
Check your income tax code and personal allowanceCheck your income tax code and personal allowance
What income do you pay tax on?What income do you pay tax on?
You pay income tax to the government on earnings from employment and profits from self-employment. You pay income tax to the government on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.
Income tax is also due on some benefits and pensions, the money you get from renting out property, and returns from savings and investments above certain allowances. Income tax is also due on some benefits and pensions, the money you get from renting out property, and returns from savings and investments above certain limits.
These rules apply in England, Wales and Northern Ireland. Scotland has different rules to the rest of the UK. These rules apply in England, Wales and Northern Ireland. Scotland has different tax rules to the rest of the UK.
What is the basic rate of income tax?What is the basic rate of income tax?
You pay the basic rate of income tax on earnings between £12,571 and £50,270 a year.You pay the basic rate of income tax on earnings between £12,571 and £50,270 a year.
The basic rate is 20%, so a fifth of the money you earn between those amounts goes to the government in income tax.The basic rate is 20%, so a fifth of the money you earn between those amounts goes to the government in income tax.
What is the higher rate of income tax?What is the higher rate of income tax?
The higher rate of income tax is 40%, and is paid on earnings between £50,271 and £150,000 a year. The top of this band will fall to £125,140 from April 2023. The higher rate of income tax is 40%, and is paid on earnings between £50,271 and £125,140.
Once you earn over £100,000 a year, you start losing your tax-free personal allowance, which means you have to pay income tax on the first £12,570 of your earnings. Once you earn over £100,000 a year, you start losing your tax-free personal allowance, which means you have to pay income tax at 40% on some of the first £12,570 of your earnings.
You lose £1 of your personal allowance for every £2 that your income goes above £100,000. If you earn more than £125,140 a year, you no longer get any personal allowance.You lose £1 of your personal allowance for every £2 that your income goes above £100,000. If you earn more than £125,140 a year, you no longer get any personal allowance.
What is the additional rate of income tax?What is the additional rate of income tax?
Under the current rules, the additional rate of income tax is 45%, and is paid on earnings above £150,000 a year. The additional rate of income tax is 45%, and is paid on earnings above £125,140 a year. Before April that threshold was £150,000.
This will drop to £125,140 on 6 April 2023. The government says about 629,000 people pay the additional rate of income tax.
The government says about 629,000 people currently pay the additional rate of income tax.
What is National Insurance?What is National Insurance?
For employees, National Insurance is in many ways similar to income tax - it is also a tax on the money you earn. For employees, National Insurance (NI) is in many ways similar to income tax: a fixed percentage of the money you earn is deducted from your wages.
It is the second biggest source of money for the government.It is the second biggest source of money for the government.
National insurance rules are different for people over state pension age
It works on some of the same thresholds as income tax.It works on some of the same thresholds as income tax.
You do not pay it on the first £12,571 you earn a year. It is then charged at 12% on earnings up to £50,271, and it is 2% on any money made above that. You do not pay it on the first £12,571 you earn a year. It is then charged at 12% on earnings up to £50,271, and 2% on any money made above that.
Mr Hunt confirmed the main National Insurance thresholds will also remain frozen until April 2028.Mr Hunt confirmed the main National Insurance thresholds will also remain frozen until April 2028.
It is not paid by people over the state pension age even if they are still working.It is not paid by people over the state pension age even if they are still working.
Employers also have to pay National Insurance.Employers also have to pay National Insurance.
Will the National Insurance cut leave me better off?Will the National Insurance cut leave me better off?
The universal credit claimants effectively paying top tax ratesThe universal credit claimants effectively paying top tax rates
Who pays most in income tax?Who pays most in income tax?
For most families in the UK, income tax is the single biggest tax they pay. You can see that in the dark green bars in the chart below.For most families in the UK, income tax is the single biggest tax they pay. You can see that in the dark green bars in the chart below.
But poorer households tend to pay a bigger share of their taxes through taxes on spending: VAT and duties - the blue areas in each bar. Those are known as indirect taxes.But poorer households tend to pay a bigger share of their taxes through taxes on spending: VAT and duties - the blue areas in each bar. Those are known as indirect taxes.
For the poorest fifth of households, VAT is the biggest single tax that is paid.For the poorest fifth of households, VAT is the biggest single tax that is paid.
How is tax different in Scotland?How is tax different in Scotland?
Some income tax rates are different in Scotland because of powers devolved to the Scottish Parliament.Some income tax rates are different in Scotland because of powers devolved to the Scottish Parliament.
These are the current income tax rates: These are the income tax rates from April 2023:
No tax paid on £12,570 personal allowance Tax-free personal allowance: £12,570 (reduced by £1 for every £2 earned above £100,000)
£12,571 to £14,732 starter rate of 19% Starter rate of 19%: £12,571 to £14,732
£14,733 to £25,688 Scottish basic rate of 20% Scottish basic rate of 20%: £14,733 to £25,688
£25,689 to £43,662 intermediate rate of 21% Intermediate rate of 21%: £25,689 to £43,662
£43,663 to £150,000 higher rate of 41% Higher rate of 42%: £43,663 to £125,140
Above £150,000 top rate of 46% Top rate of 47%: above £125,140
Personal allowance reduced by £1 for every £2 earned above £100,000. What income taxes will you pay in Scotland?
On 6 April 2023, the point at which people start paying the top rate of 46% will fall from £150,000 to £125,140.
How are tax and benefits different in Scotland?
Related TopicsRelated Topics
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TaxTax
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UK taxesUK taxes
Budget 2023
Income taxIncome tax