Income Tax Changes
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.
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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.
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.