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Income tax: How will thresholds change and what will I pay? How is National Insurance changing and what is income tax?
(8 months later)
Income tax is the government's single biggest source of money. National Insurance will be cut for 29 million workers, Chancellor Jeremy Hunt announced in his Autumn Statement.
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. However, previous changes to National Insurance (NI) andincome tax mean the overall tax burden for millions of people will still rise to record levels.
This means that millions of people will end up paying more in tax. What is National Insurance?
Budget 2023: Key points at-a-glance NI is the second biggest source of money for the government, and the rules apply across the whole of the UK.
What the Budget means for you and your money For employees, it is similar to income tax. A fixed percentage of the money you earn is deducted from your wages. Employers also have to pay NI contributions (NICs).
What is happening to income tax thresholds? Eligibility for certain benefits including the state pension depends on the amount of NICs you have made.
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. How the government raises and spends £1 trillion a year
He has also frozen the point (threshold) at which people start paying higher tax rates. How is National Insurance changing?
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. From 6 January 2024, 27 million workers will pay 10% on their earnings between £12,571 and £50,270 instead of the current 12%.
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 said the cut is worth £450 a year to a worker earning £35,400.
It says 2.6 million more people will pay higher rate tax. He also announced two changes to NI for the UK's two million self-employed people.
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. From 6 April 2024, they will pay 8% on their profits between £12,571 and £50,270, down from 9% at the moment. The government says the cut will be worth £350 a year for an average self-employed person earning £28,200.
Income tax rates, thresholds and personal allowances From the same date, self-employed people will no longer have to pay a separate category of NI called Class 2 contributions.
Check your income tax code and personal allowance The chancellor said this would save the average self-employed person £192 a year, without damaging their NI contributions record or benefits entitlement.
What income do you pay tax on? NI on income and profits above £50,270 will remain at 2%.
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. NI is not paid by people over state pension age even if they are still working.
What the Autumn Statement means for you
What is happening to National Insurance thresholds?
As wages rise, more people will have to pay NI for the first time.
That is because the chancellor has frozen the level of income at which you start paying NI, known as the threshold - currently £12,570.
Thresholds used to rise every year, typically in line with inflation. But the chancellor has said they will remain unchanged until April 2028.
Why are millions paying more income tax?
How much income tax you pay also depends on thresholds: the levels of income at which people either start paying tax, or have to pay higher rates of tax.
These are also being frozen until 2028, sothe tax-free personal allowance will remain at £12,570. Most taxpayers do not pay any tax on income below this level.
The point at which higher tax rates take effect will also not change.
As with NI, as wages rise, more people will have tostart paying tax, and more people will have to pay higher rates of tax, increasing their overall tax bill.
The freezes will create 3.2 million extra taxpayers by 2028, and 2.6 million more people will pay higher rates of tax. That's according to the Office for Budget Responsibility (OBR) - which independently assesses the government's economic plans.
It expects the policy to raise £25.5bn more a year by 2027-28 than if the NI and income tax thresholds had gone up in line with the CPI measure of inflation.
The Resolution Foundation think tank says previously announced increases of £90bn mean that taxes will rise by the equivalent of £4,300 per household between 2019-20 and 2028-29.
The OBR said "the combination of higher inflation and frozen tax thresholds means that the tax burden is going up "to its highest level in the post-war era".
It predicts that families' household disposable income will be 3.5% lower in 2024-25 than it was before the pandemic. It said this was "the largest reduction in real living standards since Office for National Statistics records began in the 1950s".
The hidden tax rise in the Autumn Statement
What are the current rates of income tax?
You pay income tax to the government on earnings from employment and profits from self-employment.
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.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 tax rules to the rest of the UK. The basic rate of income tax is 20% and is paid on earnings between £12,571 and £50,270 during the tax year, which runs from 6 April to 5 April the following year.
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.
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?
The higher rate of income tax is 40%, and is paid on earnings between £50,271 and £125,140.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 at 40% on some of the first £12,570 of your earnings. Once you earn more than £100,000 a year, you also start losing your tax-free personal allowance. This means you have to pay income tax of 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. So if you earn more than £125,140 a year, you no longer get any tax-free personal allowance.
What is the additional rate of income tax? The additional rate of income tax is 45%, and is paid on all earnings above £125,140 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. These rates apply in England, Wales and Northern Ireland.
The government says about 629,000 people pay the additional rate of income tax. Income tax rates, thresholds and personal allowances
What is National Insurance? Check your income tax code and personal allowance
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.
National insurance rules are different for people over state pension age
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 2% on any money made above that.
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.
Employers also have to pay National Insurance.
Will the National Insurance cut leave me better off?
The universal credit claimants effectively paying top tax rates
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.
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.
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 income tax rates from April 2023: These are the Scottish income tax rates from April 2023:
Tax-free personal allowance: £12,570 (reduced by £1 for every £2 earned above £100,000)Tax-free personal allowance: £12,570 (reduced by £1 for every £2 earned above £100,000)
Starter rate of 19%: £12,571 to £14,732Starter rate of 19%: £12,571 to £14,732
Scottish basic rate of 20%: £14,733 to £25,688Scottish basic rate of 20%: £14,733 to £25,688
Intermediate rate of 21%: £25,689 to £43,662Intermediate rate of 21%: £25,689 to £43,662
Higher rate of 42%: £43,663 to £125,140Higher rate of 42%: £43,663 to £125,140
Top rate of 47%: above £125,140Top rate of 47%: above £125,140
What income taxes will you pay in Scotland? 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.
But poorer households tend to pay a bigger share of their taxes through taxes on the money they spend such as VAT and duties, rather than the money they earn. These "indirect taxes" are shown in the blue areas in each bar.
For the poorest fifth of households, VAT is the biggest single tax paid.
How high are UK taxes historically?
One way of measuring how high taxes are is to consider the amount of tax raised as a proportion of the size of the economy.
At the time of the Autumn Statement, the OBR said that despite the changes made, that measure: "still rises in each of the next five years to a post-war high of 38% of GDP".
How do UK taxes compare with other countries?
If you look at the amount of tax raised as a proportion of the size of the economy in 2021 - the most recent year for which international comparisons can be made - the figure was 33.5%.
That puts the UK right in the middle of the G7 group of big economies.
France, Italy and Germany tax more, Canada, Japan and the US tax less.
Related TopicsRelated Topics
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