What to expect from the changes to income tax

Chris Hadley looks ahead to the new tax regime starting in April

A number of changes are coming to income tax in April 2023 that will affect taxpayers across the UK.

Many of these measures were announced by Chancellor of the Exchequer Jeremy Hunt in his Autumn Statement on 17 November 2022. According to Hunt, these decisions will see everyone pay “a bit more tax” from the 2023/24 tax year onwards.

Many of the decisions announced in the September mini-budget, including those affecting income tax, have been changed or scrapped completely. The new measures are expected to raise a further £34 billion a year for the UK Government.

Here, our Head of Private Services Chris Hadley highlights key points in the upcoming changes and explains how they will affect your income tax bill.

Recap of changes to income tax

Additional-rate threshold
One of the biggest announcements made in the Autumn Statement was the lowering of the additional-rate threshold for income tax from £150,000 to £125,140.

Around 660,000 taxpayers currently pay the additional rate of income tax, and a further 232,000 people will fall into the tax bracket once the changes come into place in April 2023.

This is in stark contrast to previous Chancellor Kwasi Kwarteng’s announcement that the 45% additional rate would be scrapped altogether, which has now been reversed.

Personal allowance taper
By lowering the additional rate tax threshold to £125,140, the Government has aligned the top rate of tax with the personal allowance taper.

Under current legislation, taxpayers’ personal allowance is reduced by £1 for every £2 their net income exceeds £100,000. The effect of this is that the ‘effective tax rate’ applying to income in the band from £100,000 to £125,140 is 50% greater than the prevailing publicised higher rate tax rate (60% in England, Wales and Northern Ireland and 63% in Scotland) and means that if your income is £125,140 or higher, your personal allowance will be zero.

Essentially, anyone who falls into the additional rate tax band from April onwards will pay income tax on all their earnings.

Basic rate
The basic rate of income tax in England, Wales and Northern Ireland will remain unchanged at 20% in April 2023, despite previous plans to lower it to 19%.

In the 2022 Spring Statement, then-Chancellor Rishi Sunak announced the basic rate would drop to 19% in April 2024. This plan was then supposed to be brought forward to April 2023 by Kwasi Kwarteng in the mini-budget.

However, the basic rate of income tax will instead stay fixed at 20% “indefinitely”, saving the Government approximately £6bn a year.

Frozen thresholds
The Chancellor announced several threshold freezes that will affect taxpayers in England, Wales and Northern Ireland over the coming years.

The following freezes were already in place until 2026, but will now be extended a further two years until 2028:

● The personal allowance threshold at £12,570
● The higher-rate threshold at £50,270.

Freezes to the various National Insurance contribution thresholds are also in place, which are important to be aware of alongside income tax.

How the changes will affect your income tax bill
The Government has said that the “fairest way” to restore public finances is for everyone to contribute a little, with the highest earners paying a “larger share”. However, many taxpayers who fall into lower tax bands will also be affected by the upcoming changes.

With thresholds frozen until 2028, taxpayers across all bands will see a greater proportion of their earnings going toward their income tax bill as wages rise with inflation.

The Office for Budget Responsibility (OBR) estimates these freezes will create an additional 3.2 million new taxpayers, causing 2.6 million people to fall into a higher tax bracket.

Because of this, many are viewing the threshold freezes as a “stealth tax”, and some people may find their pay rises effectively cancelled out by increased tax liabilities. For example, individuals who currently pay the 20% basic rate of tax will need to pay 40% on their income above £50,270, if it exceeds that level between now and 2028.

Furthermore, people on lower incomes may need to tighten their purse strings as inflation continues to soar while the personal allowance threshold remains fixed at £12,570.

Meanwhile, around 232,000 taxpayers currently paying the higher rate will need to pay the additional rate once the threshold is lowered in April.

According to the Government, the impact of this measure will vary depending on individual circumstances. On average, the cash loss will be £621 for those who earn between £125,140 and £150,000, and £1,243 for people with incomes above £150,000.

However, those who do fall into the additional tax rate band in April will be able to take advantage of the more generous pension relief it offers.

For taxpayers in England, Wales and Northern Ireland, basic rate relief of 20% is automatically applied to each person’s pension contributions. People who pay the higher rate can claim a further 20% on top of that, and people who pay the additional rate can claim a further an additional 5% on top of that, making the total relief received for additional rate tax payers 45%.

For taxpayers in the £100,000 to £125,140 band, the additional relief available is 40% with the total tax relief on offer increasing to 60% owing to the partial re-instatement of the personal allowance.

Work with the tax experts at Harwood Hutton
With legislation constantly evolving, it can be difficult for individuals to navigate the complexities of income tax. Without a good understanding of your obligations, you may end up with a bigger income tax bill than you bargained for and risk incurring extra costs.

Harwood Hutton’s specialist tax team can help you stay in HMRC’s good books, and may save you time and money in the long run. We can explain how the new changes will affect your finances directly, and calculate and submit your returns on your behalf.

We can also draw up an in-depth tax strategy, ensuring you take home as much of your hard-earned profits as possible. Contact us here.