In last week’s Budget the Chancellor stunned his audience by announcing that both the basic rate of tax and the highest ‘additional’ rate would be reduced from 6 April 2023.
Around 50% of taxpayers only pay tax at the basic rate and they will benefit from that rate being reduced from 20% to 19%. This had been announced by the previous Chancellor but was not going to be introduced until 2024. Moving this a year earlier has been done, we are told, to help with the cost of living crisis.
The income threshold at which taxpayers start to pay tax at 40% and the personal allowance have both been frozen for five years from April 2021 to April 2026. With inflation running at nearly 10% this will reduce the real value of the tax-free personal allowance and drag more people into the higher rate tax bracket.
Higher earning individuals will benefit the most from the Budget as the 45% additional rate of tax that applies on income over £150,000 will be abolished from 6 April 2023. These taxpayers will also be eligible to benefit from the £500 savings allowance for the first time from April 2023. The 40% rate will simply continue to apply to all higher levels of income.
These tax cuts do not apply in Scotland as the Scottish Government sets its own income tax rates on earnings and profits (not savings and dividends) which currently range from 19% to 46%. This may change when the Scottish Budget for 2023-24 is announced later this year. The Welsh Government will also have to decide whether to follow Westminster and apply tax cuts to match those in England from 2023.
In addition to cutting tax on earnings the Chancellor has chosen to cut the tax payable on dividend income by 1.25 percentage points from 6 April 2023. This cut will apply across the whole of the UK.
From 6 April 2023 the rates of income tax in England and Northern Ireland will be:
| Earnings band | Earnings and profits | Dividends |
| Basic rate: up to £50,270 | 19% | 7.5% |
| Higher rate: above £50,270 | 40% | 32.5% |
| Additional rate | Abolished | Abolished |