As part of Kwasi Kwarteng’s mini Budget, he announced a 1p cut to the basic rate of income tax from April 2023.
This means people earning up to £50,270 will pay 19p in the pound in income tax, down from 20p.
It will result in 31 million people saving an average of £170 a year, at a cost of £5bn to the government, according to Kwarteng.
It will apply to the basic rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland and the savings basic rate which applies to savings income for taxpayers across the UK.
Further, it will apply to the default basic rate which applies to non-savings and non-dividend income of any taxpayer that isn’t subject to either the main rates or the Scottish rates of income tax, the government confirmed.
The cut to the basic rate of income tax was already announced in March 2022 under previous Chancellor Rishi Sunak and was expected to take place in 2024, but today’s announcement means the date has been brought forward by one year.
Additional rate of income tax
However, Kwarteng went further than his predecessor in the government’s Growth Plan 2022 by announcing that the additional rate of tax – 45 per cent on those earning £150,000 or more – will be abolished from April 2023.
In its place will be a single higher rate of income tax at 40 per cent (currently applied to those earning between £50,271 and £150,000).
According to the government, the removal of the UK’s top rate tax – which is higher than countries like Norway, USA and Italy – is “designed to attract the best and the brightest to the UK workforce, helping businesses innovate and grow”.
It added that it will apply to the additional rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland. The additional rate for savings, dividends and the default additional rate will also be removed from April 2023, and this change will apply UK-wide. “This will improve the competitiveness of the UK tax system,” the government added.
This also means additional rate taxpayers who were excluded from the Personal Savings Allowance (allowing people to earn up to £1,000 of savings interest without paying tax) will now be eligible.
The government confirmed that as the additional rate of income tax will be removed, current additional rate taxpayers will also benefit from the Personal Savings Allowance of £500 for higher rate taxpayers.