YOU’ll pay a certain amount of income tax depending on how much you earn – but what is the basic rate and how much can you save?
Jeremy Hunt has confirmed that a cut to income tax won’t take place and the basic rate will remain at 20% indefinitely.
Income tax is a tax you pay on your earnings
Income tax takes out a cut of your earnings once they’ve reached a certain threshold.
These different tax rates increase with the more money you earn.
There’s also the personal allowance, which means the first chunk of the money you make is entirely tax-free.
We explain how personal allowance affects your wages and what changes the Chancellor has announced.
What is my personal allowance?
The personal allowance is the amount you can earn each year tax-free.
It can change from one year to the next and is set by the government.
In the current tax year – which runs from April 6 2022 to April 5 2023 – the figure is £12,570.
However, this amount may be bigger if you claim certain allowances including, blind person’s allowance, marriage allowance and child tax credit.
You will also not have to pay tax on savings interest, dividends and the first £1,000 of income if you are self-employed.
How do I calculate tax?
If you earn £12,570 or less, you currently pay no income tax.
On earnings between £12,570 and £50,270, you pay the basic income tax rate of 20%.
The previous Chancellor, Kwasi Kwarteng announced in last month’s mini-Budget that he would cut the basic rate of income tax to 19p in April 2023.
But Jeremy Hunt tore Liz Truss’ mini-Budget to shreds in a bombshell statement saying he wouldn’t go through with the cut and the basic rate will remain at 20% indefinitely.
Wages of £50,271 and above are taxed at the higher rate of 40%.
And the additional rate of income tax, which applies to earnings above £150,000, is 45%.
Anyone who earns over £100,000 does not get any tax-free personal allowance – they will pay income tax on everything they earn.
The thresholds for income tax generally rise each year so that people can earn more without paying more tax.
And just keep in mind that your personal allowance might be different if you’re entitled to certain allowances or earn a lot of money.
The marriage allowance is a tax break where one partner in a married couple can transfer some of their unused personal allowance to another.
And people with sight issues can get the blind person’s allowance, which increases this tax-free amount.
What changes will there be?
Before Kwasi Kwarteng’s mini-Budget, workers in England, Northern Ireland and Wales were originally set to see the basic rate of income tax fall by one percentage point from 20% to 19% from April 2024.
But now Jeremy Hunt has ruled out any cut to income tax for the foreseeable.
It comes as the Chancellor also:
- Reversed duty cuts on beer, cider, wine and spirits
- Said that the Energy Price Guarantee will only last until April
- Kept the cut to National Insurance
- Reaffirmed the cut to stamp duty
But the cancellation of the cut to income tax means that the average taxpayer will now miss out on £170 in savings next year.
Data provided by Hargreaves Lansdown suggests that the 1p cut to the basic rate of income tax would have saved those earning £15,000 a year £24.30 a year.
Those earning £25,000 a year would have saved £124.30 and workers with incomes of £35,000 a year would save £224.30.
Those earning £50,000 a year would have saved £374.
How do I check my tax-free personal allowance?
Your tax-free personal allowance amount is usually reflected in your tax code, which can be found on your payslip.
The letter L in your tax code signals that you’re entitled to the standard tax-free personal allowance.
The letter M means you’ve transferred some of your personal allowance to your partner using the marriage allowance.
Meanwhile the letter N signals the opposite – you’ve received some of your partner’s tax-free personal allowance.
