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Additional rate of income tax scrapped

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The new Chancellor, Kwasi Kwarteng, has reversed the NIC increases imposed by Rishi Sunak, and dramatically cut income tax at the basic and additional rates.

23rd Sep 2022
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Cutting income tax was the carrot Liz Truss dangled in front of the Conservative Party members who were eligible to vote for her in the leadership election. 

The amount of tax payable by individuals on earnings can be reduced in four main ways:

  1. Reduce the rates of income tax 
  2. Reduce the rates of national insurance 
  3. Increase allowances
  4. Increase thresholds where higher rates apply

The Chancellor has chosen to go with options 1 and 2, and there is no indication that the levels of the personal allowance, marriage allowance, or income tax thresholds will change.  However, Kwasi Kwarteng did indicate that there will be another fiscal statement later this year, when the Office for Budget Responsibility will deliver its report.  

Personal tax cuts 

The shock news in this mini-Budget was the scrapping of the additional rate of income tax which was introduced at 50% just before Labour lost the 2010 General Election. This rate was later cut to 45% on income over £150,000. The 40% band will be the highest tax band, which also means that everyone in that band will benefit from the £500 personal savings allowance. 

From 6 April 2023 the rates of income tax in England and Northern Ireland will be:

Earnings band  On earnings and profits  On dividends
Basic rate  19% 7.5%
Higher rate 40% 32.5%
Additional rate  Abolished  Abolished 

 

The Treasury did not clarify whether the tax charged on loans to participators under s.455 CTA 2010 will also be reduced to 32.5%.

Different rates for Scotland

The Scottish and Welsh governments have the power to set different rates of income tax on earnings, profits and pensions, but not on savings, dividends, or on capital gains. 

Scotland currently has five different rates of income tax ranging from 19% to 46%, so it will be interesting to see if the differential in rates and bands continues for taxpayers in Scotland. 

Wales has kept its income tax rates in line with the rest of the UK, so taxpayers in Wales pay the same as those in England. The Welsh government doesn’t have the power to impose different tax bands like the Scottish government. However, the Welsh Labour government may want to plough its own furrow and tweak the rates applicable from April 2023. 

NIC rates down 

In advance of the Chancellor’s statement today HM Treasury announced that the increases applied to all NIC rates, as introduced from 6 April 2022, would be reversed with effect from 6 November 2022.

The rates of class 1 NIC are taken back to the levels that were in place on 5 April 2022, but the NIC thresholds which were increased from 6 July 2022 are not being reversed.

Employees’ class 1 NIC

  • 12% on earnings in the band: £1,048 to £4,189 per month ( £12,570 to £50,270 per year) 
  • 2% on earnings above £4189 per month (£50,270 per year)

Employers’ class 1 NIC

  • 13.8% on earning above £758 per month (£9,100 per year)

The employment allowance which was raised from £4,000 to £5,000 on 6 April 20022 remains at the higher level.

Where the NIC is calculated over the full tax year, such as for Class 1B, 1A, director’s pay and Class 4 the rates are blended, resulting in some very odd rates as Ian Holloway explains

HMRC has produced a detailed table of the revised rates to help software developers amend their payroll products. It has also promised that the HMRC free software: Basic PAYE Tools will automatically be updated before 6 November to include the updated rates.   

Rates of Class 4 NIC for the full tax year 2022/23 will be 9.73% and 2.73%, as set out in clause 2 of the Health and Social Care Levy (Repeal) Bill

As the name of that Bill suggests, it repeals the Health and Social Care Levy Act 2021, and therefore abolishes the Health and Social Care Levy before it comes into effect. This levy potentially set a precedent for applying a version of NIC to the earnings (but not pensions) of people who were over state pension age. That Rubicon won’t now be crossed, and working pensioners can rest easy knowing they will pay less NIC than other workers purely on the basis of their age.

Replies (16)

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By Paul Crowley
23rd Sep 2022 13:48

Much appreciated
Not so much a mini budget

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By NotAnAccountant2
23rd Sep 2022 14:35

Sorry, couldn't resist

Quote:
The employment allowance which was raised from £4,000 to £5,000 on 6 April 20022 remains at the higher level.

Is that what they call fiscal drag?

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Replying to NotAnAccountant2:
By ireallyshouldknowthisbut
23rd Sep 2022 14:44

No -fiscal drag is keeping the HR tax threshold at £50k since April 2019, but April 2023 that will be inflation of what 25%? Same with personal tax threshold.

Ditto £100k loss of PA the one thing I would have liked to see junked, well ahead of the 45% band. That would be north of £150k if it kept pace with inflation.

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Replying to ireallyshouldknowthisbut:
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By Paul Crowley
23rd Sep 2022 15:58

The problem with big round sums is that there seems to be reluctance to move them in small increases.
Just so easy for politicians to remember £50K, £100K and £150K
And any significant movement after a number of years is likely to be called out as benefits to the rich
I really can see the problem both ways, particularly the £50K because that triggers HICBC

Anyone remember £8,500 as higher paid employee?
Do not think it ever moved as it brought taxable benefits in at cost to employer being taxed rather than second hand value for those earning less

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Replying to Paul Crowley:
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By Hugo Fair
23rd Sep 2022 23:59

I don't think the £8.5k threshold (which meant that you were treated as a higher earner and so any additional benefits were subject to tax and NI) ever changed ... but it was eventually completely abolished (in 2014 alongside entry of RTI).

"Income Tax: abolition of the £8,500 threshold for benefits in kind:
The measure abolishes the £8,500 threshold that determines whether employees pay Income Tax on all of their benefits in kind and expenses.
Employers will have additional National Insurance contributions to pay on the benefits in kind and certain expenses provided to employees earning at a rate of less than £8,500 a year."

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Replying to Hugo Fair:
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By Paul Crowley
24th Sep 2022 14:36

The quote is a bit misleading
Those below £8,500 were meant to be have the second hand value, as in what can I sell this for, added to the salary to see if limit exceeded
If the car benefit added to salary was more than £8,500 then car benefit was taxed
And there was a different treatment for medical cover.
And directors never did have any such limit, and a car to director's wife was taxed on director.
This of course subject to memory failures.

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Replying to Paul Crowley:
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By Hugo Fair
24th Sep 2022 18:19

You're quite right (and your memory for the details is at least the equal of mine)!

The extract I found is typical GOV.UK (even from the old archived pages) in that it is simultaneously not strictly untrue and yet, as you say, manages to be misleading (due to omission of key details).
Oh for a return to the days when HMRC controlled their own web pages ...

Thanks (2)
Replying to ireallyshouldknowthisbut:
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By NotAnAccountant2
23rd Sep 2022 16:44

ireallyshouldknowthisbut wrote:

No -fiscal drag is keeping the HR tax threshold at £50k since April 2019, but April 2023 that will be inflation of what 25%? Same with personal tax threshold.

Ditto £100k loss of PA the one thing I would have liked to see junked, well ahead of the 45% band. That would be north of £150k if it kept pace with inflation.

Wouldn't that be the same effect as increasing the employment allowance by 1000 in 18000 years time? Just on rather longer time scales. :-)

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Replying to ireallyshouldknowthisbut:
paddle steamer
By DJKL
26th Sep 2022 12:00

We would have dreamed of £50,000.

There were hundreds of thousands of us only getting £43,663.

£43,663, you were lucky, .......

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By Hugo Fair
24th Sep 2022 00:17

I'm really looking forward to seeing how Nicola and her SNP chums react ...

Can they get away with emphasising that a 6% extra rate for higher earners is irrelevant to the vast majority of Scottish taxpayers (and indeed justified) - or will they take frit (having so far played at differential thresholds & rates that actually make little difference to most people)?

But mostly I'm just amazed that the Trump (sorry Truss) and Kwarteng show is so ready to embrace an electoral suicide pact. They can't really believe what they say, can they?

I've mentioned before that Whitehall depts have been 'game-playing' civil insurrection for the forthcoming Winter (based on Energy costs and then exacerbated by general inflation on staples like food). Will they be allowed to now factor in the impact of such a nakedly greedy bid to reward the wealthy but not help the needy?

Irrespective of political leanings (or morality), Thatcher arrived after nearly a decade of rapidly worsening economic collapse - and managed to blame Labour & the Unions, before starting on her 'crusade'.
Truss seems keen to emulate this - but appears not to have noticed that her party has been in power for the last decade+. So who is she going to blame for unpopular policies that put the demands of the rich before the majority of the electorate (and with a GE round the corner)?

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Replying to Hugo Fair:
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By johnjenkins
26th Sep 2022 09:36

Nicola will find a way to use any thing in the budget as to why Scotland should have independence.

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Replying to johnjenkins:
paddle steamer
By DJKL
26th Sep 2022 12:15

A touch of jealousy, perhaps, as you cannot escape.

If we do escape you are likely stuck with the current crowd for a generation or more.(Shudder)

One of the stronger arguments against independence was weakness of a new currency, not sure that one holds much water any more given the recent trashing of the pound. (Is parity with the dollar now inevitable?)

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Replying to DJKL:
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By johnjenkins
26th Sep 2022 13:37

Parity with the dollar and Euro should have been done when we left Euroland. It wouldn't surprise me if it had already been discussed.

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Replying to Hugo Fair:
paddle steamer
By DJKL
26th Sep 2022 12:10

Sorry £43,633 instead of £50,000 does make a difference to me, a £1,273 difference (£6367 @20%), which I, for one, really resent and actually does impact quite a lot of people (Though I still would not now vote for the Conservatives.) I appreciate we had our £2,097 wide 19% band but we also had our £18,366 wide 21% one plus 41% over £43,633)

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Replying to DJKL:
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By Hugo Fair
26th Sep 2022 14:03

I'm sure it does (make a difference to you) ... and I wasn't intending to belittle the impact for you & others. But I'm not sure that you're representative of "the vast majority of Scottish taxpayers"?

My main point however (other than a genuine interest in seeing how the SNP cope with the changing landscape) was what I referred to as "an electoral suicide pact" that this new lot seem determined upon. As you say, the FX rate has an impact too.

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Replying to Hugo Fair:
Danny Kent
By Viciuno
26th Sep 2022 14:13

Services in Scotland are still free at point of use for the most part. We don't pay anything for eye tests, prescriptions and the vast majority of our NHS remains state-run (we don't have private companies sending out ambulances without paramedics for example...)

The amount of people who want everything for nothing astounds me. Shear greed, can't claim ignorance from a bunch of (financially) educated accountants.

Sure plenty of people praising the tax cuts will be campaigning for (frankly, already well paid) nurses, police and teachers to receive 10% pay rises in line with inflation - without realising that is it us, the tax payer, that funds these services.

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