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Income tax: How will thresholds change and what will I pay?

Woman calculating her taxesImage source, Getty Images

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 funding.

What is happening to income tax thresholds?

Chancellor Jeremy Hunt has frozen the income tax personal allowance at £12,570 until April 2028.

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.

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.

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.

What income do you pay tax on?

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 allowances.

These rules apply in England, Wales and Northern Ireland. Scotland has different rules to the rest of the UK.

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 £150,000 a year. The top of this band will fall to £125,140 from April 2023.

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.

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?

Under the current rules, the additional rate of income tax is 45%, and is paid on earnings above £150,000 a year.

This will drop to £125,140 on 6 April 2023.

The government says about 629,000 people currently pay the additional rate of income tax.

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.

It is the second biggest source of money for the government.

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.

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.

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?

Some income tax rates are different in Scotland because of powers devolved to the Scottish Parliament.

These are the current income tax rates:

  • No tax paid on £12,570 personal allowance
  • £12,571 to £14,732 starter rate of 19%
  • £14,733 to £25,688 Scottish basic rate of 20%
  • £25,689 to £43,662 intermediate rate of 21%
  • £43,663 to £150,000 higher rate of 41%
  • Above £150,000 top rate of 46%
  • Personal allowance reduced by £1 for every £2 earned above £100,000.

On 6 April 2023, the point at which people start paying the top rate of 46% will fall from £150,000 to £125,140.

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