Mini Budget 2022: The UK government has announced that it will reduce the basic rate of income tax by one pence to 19% as of 6 April 2023, one year earlier than planned.
According to Chancellor of the Exchequer Kwasi Kwarteng’s speech to the House of Commons, this will result in basic rate taxpayers being an average of £130 better off, while higher rate taxpayers will take home an extra £360 in the 2023-24 tax year.
The additional rate of 45% on incomes over £150,000 will also be scrapped as of 6 April 2023.
However, different income tax rates apply in Scotland, and the Scottish government has yet to announce any equivalent changes.
Andrew Tully, technical director at Canada Life, said: “Reducing the basic rate of income tax will cost the treasury around £5 billion a year, while scrapping the additional rate of tax will cost about £2 billion, so these are both hugely significant tax cuts. There is a pension planning opportunity for those who can afford to make pension contributions in the current tax year. Additional rate taxpayers will get 45% relief, whereas next year contributions will only receive 40% relief. Similarly, basic rate taxpayers can obtain 20% relief on contributions this year, which will fall to 19% next year.”
Steven Cameron, pensions director at Aegon, added: “However, income tax thresholds are currently frozen until 2026 and over time, wage increases mean people are paying tax on more of their income, and in some cases are being dragged into paying higher rate tax.
“While this is a welcome boost to take-home pay, for many it will fail to compensate for frozen income tax thresholds. Unfreezing these would be a much more powerful lever to support lower and modest earning households. For anyone earning under £37,670, increasing the basic rate threshold by 10%, around the current rate of inflation, would offer a greater income tax saving than cutting the rate of income tax from 20% to 19%.”