Personal Income Tax
The Chancellor announced that he intends to cut the basic rate of income tax from 20% to 19% from 6 April 2024. This costs over £5 billion a year and therefore has a significant effect on the public finances. The promise is conditional on the government continuing to meet its ‘fiscal rules’ – borrowing going down and not being required for day-to-day spending – but Mr Sunak must be very confident that this will happen. It would be very embarrassing not to carry this through.
The promised cut will not affect the tax rates in Scotland, which are set by the Scottish Parliament. The Scottish Government will receive additional funding in the tax year 2024/25 and will be able to decide whether to pass it on to taxpayers as a tax cut.
Reductions in the basic rate of tax are not generally favourable to charities, because they depend on claiming back basic rate tax paid by donors under Gift Aid. If the donor gives the same net amount, the charity is entitled to a smaller tax credit. The current rate of tax credit will be maintained for three years, until April 2027, to reduce the impact on the income of charities.
Tax rates and allowances – 2022/23 (Table A)
As announced a year ago, the income tax rates and bands and the main allowances are frozen at their 2021/22 levels until the end of 2025/26, insteadof the usual inflation-linked increases each year. Although this means that someone with the same income will pay the same tax year on year, theeffect of inflation on salaries and business profits means that this represents a significant tax increase over the period. Based on last year’s estimates, government receipts for 2025/26 were forecast to rise by £8 billion because of this. Inflation will add to the increase, and the promised cut in the basic rate from 2024/25 only returns part of it to taxpayers.
Two other thresholds remain fixed as they have been since they were introduced: the income levels at which the High Income Child Benefit Charge begins to claw back Child Benefit receipts (£50,000 since 2012/13) and at which tax-free personal allowances are withdrawn (£100,000 since 2010/11). These measures create a higher marginal tax rate in the income bands £50,000 – £60,000 (for those in receipt of Child Benefit) and £100,000 – £125,140 (as the personal allowance is reduced to nil). Inflation brings more people each year within these charges.
The Scottish Parliament sets its own tax rates and thresholds for Scottish taxpayers for non- savings, non-dividend income. As shown in the table, the starter rate for those on low incomes is1% below that applicable in the rest of the UK, but the intermediate, higher and top rates are 1% above their equivalents in the rest of the UK, and the higher rate of 41% applies at a lower income level. The Welsh Government has similar powers for Welsh taxpayers, but has not varied the main UK rates.
The tax rates on dividend income over £2,000 will increase for the tax year 2022/23. The ordinary rate, paid by basic rate taxpayers, will rise from 7.5% to 8.75%; the upper rate becomes 33.75% (from 32.5%) and the additional rate 39.35% (from 38.1%). These rates will apply across the UK. The addition of 1.25% to each rate is related to the increases in National Insurance Contributions and the introduction of the Health and Social Care Levy described further below, and is intended to ensure that individuals who work through companies and take their profits as dividends rather than salary cannot avoid paying the charge. However, it will also apply to dividends from passive investments, as well as from personal companies.
The 33.75% rate will also apply to tax payable by close companies (broadly, those under the control of five or fewer shareholders) on ‘loans to participators’ that are not repaid to the company within 9 months of the end of the accounting period, where the loan is advanced on or after 6 April 2022.
High Income Child Benefit Charge (HICBC)
The HICBC applies where a taxpayer has income of over £50,000 and is the higher earner of a couple where one partner receives Child Benefit. A tax case showed that HMRC could not raise a ‘discovery’ assessment to collect the HICBC where a person had not paid it because they had not been aware they were liable and had not been asked to file a tax return. The law has now been amended with retrospective effect to enable HMRC to collect the charge in these circumstances.