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Fiscal drag raises £19bn in income tax

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The freezing of the personal allowance, basic rate band and NIC thresholds at the 2021/22 levels will raise £19.18bn according to the government’s impact assessment.

27th Oct 2021
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The Spring 2021 Budget confirmed that the personal allowance would be frozen at £12,570 until 6 April 2026, and the basic rate band threshold also would be fixed at £37,700 for the same period.

The combination of those two measures means that individual taxpayers in England and Northern Ireland pay 20% tax on earnings, profits and savings up to £50,270 per year. Scottish taxpayers pay income tax at the intermediate rate of 21% between £27,997 and £46,462, and this band may well change for 2022/23. The income tax bands for Welsh taxpayers have so far matched those for England.

The class 1 NIC upper earnings limit, and class 4 NIC upper profits limit, are also aligned with the basic rate band upper threshold at £50,270 for five years from 2021/22 to 2025/26 inclusive.

The combination of all these measures, coupled with the effect of inflation, mean that more people fall into the higher tax bands as time moves on; the concept knowns as fiscal drag. It is a sneaky way to collect more tax without raising tax rates.

Personal allowances

The freezing of the personal allowance means the transferable portion (the marriage allowance) is also frozen at the 2021/22 level. The recipient of the marriage allowance must be a basic rate taxpayer, or if a Scottish taxpayer, pay no more than the intermediate rate (21%).

The married couple’s allowance is only available where at least one party to the marriage or civil partnership, was born before 6 April 1935, so it is limited to a decreasing population of taxpayers. This allowance provides tax relief at 10% on the amount of the income covered by the allowance, which is also tapered according to total income.

  2022/23

£

2021/22

£

Personal allowance 12,570 12,570
Income limit for personal allowance 100,000 100,000
Lower income threshold for HICBC 50,000 50,000
Allowances for couples:    
Marriage Allowance 1,260 1,260
Married couple’s: minimum 3,640 3,530
Married couple’s: maximum 9,415 9,125
Income limit for age-related and married allowances 31,400 30,400
Other allowances:    
Blind person’s allowance 2,600 2,520
Rent-a-room relief 7,500 7500
Trading allowance 1,000 1,000
Property allowance 1,000 1,000

Tax rates on non-savings and non-dividends

Income tax rates for taxpayers in England and Northern Ireland have not been changed, with the exception of tax on dividends. Taxpayers who are tax-resident in Scotland or Wales are subject to income tax on general income (ie: not from savings or dividends) at rates set by the Scottish and Welsh Parliaments respectively.        

Taxable general income in England and Northern Ireland 2022/23

%

2021/22

%

Basic rate: 0–£37,700 20 20
Higher rate: £37,701–£150,000 40 40
Additional rate: over £150,000 45 45

Tax rates on savings income

The personal savings allowance (PSA) is available to all basic rate individual taxpayers, including for Scottish and Welsh basis rate taxpayers (based on the English thresholds), at £1,000 per year. Higher rate individual taxpayers have a PSA of £500, but additional rate taxpayers are not eligible for a PSA. Trustees are not entitled to the PSA for the trust.  The rates on savings income have not been increased.

Savings income in UK 2022/23 2021/22
Savings rate band: 0 - £5000 0% 0%
Basic rate band: 0 - £37,700 20% 20%
Personal Savings Allowance: £1,000 0% 0%
Higher rate band £37,701 – £150,000 40% 40%
Personal Savings Allowance: £500 0% 0%
Additional rate band: over £150,000 45% 45%

Tax on dividend income

The rate of income tax on dividend income will be increased by 1.25 percentage points for 2022/23 to match the increase in national insurance rates. These rates apply to all taxpayers wherever they are resident in the UK.  

The dividend allowance has not been changed for 2022/23.

Dividends within: 2022/23 2021/22
Basic rate band 8.75% 7.5%
Dividend allowance £2,000 £2,000
Higher rate band 33.75% 32.5%
Dividend allowance £2,000 £2,000
Additional rate band 39.35% 38.1%
Dividend allowance £2,000 £2,000

Child benefit claw-back

The high income child benefit charge (HICBC) was introduced in January 2013 to claw back child benefit paid to families where the higher earner is a higher rate taxpayer.

However, the threshold to activate the HICBC was not tied to the basic rate band threshold, but instead was set at an arbitrary level of £50,000 of ‘adjusted net income’. This is rh taxpayer’s income before deduction of allowances, but after deduction of losses and any relief for pension contributions.

The HICBC claws back 1% of the child benefit received by the family for every £100 of adjusted net income above £50,000. Once the adjusted net income of the highest earner exceeds £60,000, the HICBC is equivalent to 100% of child benefit received by the family. These thresholds have not been changed since 2013.

In 2021/22 taxpayers paying the basic rate of tax, can be subject to the HICBC, as the basic rate band plus personal allowance covers £50,270 of income. It is disappointing that the Chancellor has not fixed this anomaly in this Budget.

Replies (3)

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By AndyC555
27th Oct 2021 16:12

Fiscal drag. The level at which you start losing your personal allowance was set at £100k in 2010/11 and hasn't moved since. Nor does it seem likely to.

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paddle steamer
By DJKL
27th Oct 2021 16:14

I like your £15,270 in the text but suspect you want to change it to £12,570 (the rule of 9 strikes again)

Thanks (2)
Replying to DJKL:
Quack
By Constantly Confused
28th Oct 2021 07:53

DJKL wrote:

I like your £15,270 in the text but suspect you want to change it to £12,570 (the rule of 9 strikes again)

The 9 test has saved me much time and effort over the years, I love telling people about it when they are struggling to reconcile a total.

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