23 September 2022
If you are covering the abolition of the 45% income tax rate, please find comments from Rachael Griffin, tax and financial planning expert at Quilter.
"The abolition of the top rate of income tax will benefit around 1.9% of the UK’s highest earners from April 2023. Kwarteng will also be hoping, somewhat counterintuitively, that it will also increase the tax take for the Treasury.
"For many additional-rate taxpayers, earnings above £150,000 the abolition of the 45% rate will significantly reduce their income tax bill. Someone earning £175,000 will take home an additional £1,250 a year which increases to £3,280 if you include the government’s u-turn on the 1.25 percentage point national insurance hike.
"Meanwhile a £250,000 earner will earn almost £8,000 extra from these reforms. Those earning £500,000 a year will have a whopping £17,500 in take home pay from the abolition of the 45% rate, which ups to £23,592 with the NI reversal included."
Impact on take home pay of scrapping the 45% income tax band and reversing NI
|
Salary |
45% to 40% |
Reducing NI by 1.25% |
Total |
|
£150,000.00 |
£0.00 |
£1,717.88 |
£1,717.88 |
|
£175,000.00 |
£1,250.00 |
£2,030.38 |
£ 3,280.38 |
|
£200,000.00 |
£2,500.00 |
£2,342.88 |
£4,280.38 |
|
£250,000.00 |
£5,000.00 |
£2,967.88 |
£7,967.88 |
|
£300,000.00 |
£7,500.00 |
£3,592.88 |
£11,092.88 |
|
£400,000.00 |
£12,500.00 |
£4,842.88 |
£17,342.88 |
|
£500,000.00 |
£17,500.00 |
£6,092.88 |
£23,592.88 |
"Scrapping the additional-rate tax band could however be harmful for higher earners’ pension savings as under the current rules they can claim tax relief on pension contributions at their nominal income tax rate. So, it could mean their pension tax relief falls from 45% to 40%, subject to the tapered annual allowance.
"With the UK government facing a black hole in its finances following the pandemic and energy price guarantee, Kwarteng is backing that the theory that you can cut taxes to increase revenue and he may be proved to be correct as some people would no longer keep their income down to avoid the additional rate. Truss and Kwarteng are sending a Conservative signal that they want people to do well.
"The amount of Income Tax paid by UK taxpayers has almost doubled in the last 20 years, from £324.7 billion in 2002-03 to £633.4 billion in the tax year 2019-20, with the number of additional-rate taxpayers rising the fastest. When the freeze to the personal allowance was announced last year, the Office for Budget Responsibility calculated that the freeze would push one million taxpayers into the higher tax bracket.
"It could take a couple of years before we truly see the impact of the abolition of the higher rate tax band on the economy. For Truss and Kwarteng this may prove not be time enough as voters will have their say at the polls no later than January 2025."
