Income tax: How will thresholds change and what will I pay?
Published
12 April
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Budget 2023
Woman calculating her taxes
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Income tax is the government's single biggest source of money.
On 6 April the point at which the highest earners start paying the top rate of tax came down, but other thresholds were left unchanged.
This means that millions of people will end up paying more in tax.
Budget 2023: Key points at-a-glance
What the Budget means for you and your money
What is happening to income tax thresholds?
Chancellor Jeremy Hunt has frozen the income tax personal allowance at £12,570 until April 2028. Basic rate tax payers do not have to pay any tax on income below this level.
He has also frozen the point (threshold) at which people start paying higher tax rates.
It means that as wages rise, people will pay tax on a larger proportion of their earnings, and more people will move into higher tax brackets.
The Office for Budget Responsibility - which independently assesses the government's economic plans - estimates that freezing thresholds until 2028 will create an additional 3.2 million new taxpayers.
It says 2.6 million more people will pay higher rate tax.
The freezes are expected to raise £25.5bn more a year by 2027-28, than if the thresholds had increased in line with the CPI measure of inflation.
Income tax rates, thresholds and personal allowances
Check your income tax code and personal allowance
What income do you pay tax on?
You pay income tax to the government on earnings from employment and profits from self-employment during the tax year, which runs from 6 April to 5 April the following year.
Income tax is also due on some benefits and pensions, the money you get from renting out property, and returns from savings and investments above certain limits.
These rules apply in England, Wales and Northern Ireland. Scotland has different tax rules to the rest of the UK.
Graphic showing income tax bands (April 2023)
What is the basic rate of income tax?
You pay the basic rate of income tax on earnings between £12,571 and £50,270 a year.
The basic rate is 20%, so a fifth of the money you earn between those amounts goes to the government in income tax.
What is the higher rate of income tax?
The higher rate of income tax is 40%, and is paid on earnings between £50,271 and £125,140.
Once you earn over £100,000 a year, you start losing your tax-free personal allowance, which means you have to pay income tax at 40% on some of the first £12,570 of your earnings.
You lose £1 of your personal allowance for every £2 that your income goes above £100,000. If you earn more than £125,140 a year, you no longer get any personal allowance.
What is the additional rate of income tax?
The additional rate of income tax is 45%, and is paid on earnings above £125,140 a year. Before April that threshold was £150,000.
The government says about 629,000 people pay the additional rate of income tax.
What is National Insurance?
For employees, National Insurance (NI) is in many ways similar to income tax: a fixed percentage of the money you earn is deducted from your wages.
It is the second biggest source of money for the government.
Stock image of a pensioner looking at a letter
IMAGE SOURCE,GETTY IMAGES
Image caption,
National insurance rules are different for people over state pension age
It works on some of the same thresholds as income tax.
You do not pay it on the first £12,571 you earn a year. It is then charged at 12% on earnings up to £50,271, and 2% on any money made above that.
Mr Hunt confirmed the main National Insurance thresholds will also remain frozen until April 2028.
It is not paid by people over the state pension age even if they are still working.
Employers also have to pay National Insurance.
Will the National Insurance cut leave me better off?
The universal credit claimants effectively paying top tax rates
Adam Corlett, principal economist at the think tank, said "abandoning the usual uprating of tax thresholds" was a "tried and tested way for governments of all stripes to raise revenue in a stealthy way".
"But it is the far bigger than anticipated scale of the government's £40bn stealth tax rise that stands out," he said.
A spokesperson for HM Treasury said taxes were lower in the UK than "any major European economy, despite the difficult decisions we've had to make to restore public finances after the dual shocks of the pandemic and Putin's illegal invasion of Ukraine".
They said "driving down inflation is the most effective tax cut we can deliver right now".
"The chancellor has said he wants to lower the tax burden further - but has been clear that sound money must come first," they added.
Chancellor Jeremy Hunt has said it will be "virtually impossible" to deliver tax cuts until the UK economy improves, despite calls for measures to reduce taxes in the Autumn Statement in November.