Government U-turn on 45% income tax
Only ten days since the dramatic Mini Budget announcements, the Government has performed an astonishing U-turn and will now retain the 45% additional rate of Income Tax for someone earning over £150,000.
Additional rate taxpayers will still have the benefit of the reversal of the National Insurance increase from 6 November 2022 and reducing the basic rate of Income Tax by 1% from 6 April 2023. Someone earning £200,000 will be better off by £1,833 per annum, compared to the current tax year (see table of calculations of below).
Retaining the 45% additional rate of Income Tax will presumably mean the highest rate of dividend tax will remain at 38.1%, and additional rate taxpayers will not be able to benefit from the £500 personal savings allowance, but the Chancellor’s early morning announcement was silent on this detail.
I wouldn’t be surprised if Liz Truss and Kwasi Kwarteng now looked at other tax cutting measures at the Autumn Budget on 23 November, but they will need to tread very carefully given the recent social and political backlash and will need a fully costed plan to substantiate any changes.
I expect the Government has asked the Treasury to start looking at:
• Unfreezing the personal tax allowances and thresholds so they are increased in line with inflation
• Removing the £100,000 personal allowance taper which creates a 60% marginal rate of Income Tax
• Raising the Child Benefit threshold from the current £50,000 level, or abolishing the child benefit clawback completely
• Abolishing the pension annual allowance taper when someone’s income reaches £240,000
Such measures (or a combination of) could end up costing far more than the estimated £2 billion from abolishing the 45% additional rate of Income Tax, but would appear more popular.
1. Tax rates and allowances are actual published rates for 2022/23
2. National insurance rates reduced by 1.25% from 6 November 2022
3. Basic rate income tax reduced by 1% from 6 April 2023