Last month, the former Chancellor Kwasi Kwarteng outlined a proposal to bring forward the reduction of the basic rate of income tax from 20 percent to 19 percent. Following the unfavourable reception to the mini-Budget, Mr Kwarteng has been replaced by Jeremy Hunt in the role. Speaking to the BBC over the weekend, Mr Hunt said “some taxes will have to go up” as the British economy continues to face the prospect of a recession. In his statement today, the Chancellor confirmed the basic rate of income tax will remain at 20 perent “indefinitely”.
Later today, Mr Hunt will appear in front of Parliament to answer questions about the reversal of the majority of Prime Minister Liz Truss’ mini-Budget. However, to ease market concerns, the Chancellor gave a public video statement to inform the public and investors as to the Government’s next steps.
On income tax, Mr Hunt said: “It is a deeply held Conservative value – a value that I share – that people should keep more of the money that they earn. But at a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut.”
Discussing the impact of today’s decision, Quilter’s tax and financial planning expert Rachael Griffin said: “The Government is now scrambling to show some semblance of credibility on tax and spending, as they dig their way out of Kwasi Kwarteng’s calamitous ‘mini budget’.
“The latest U-turn on a policy-that-never-was sees the reduction in income tax from 20 percent to 19 percent from April 2023 scrapped. The idea that you can cut taxes in search of growth is quickly being swept aside for austerity mark II.
“Had the cut come into place in April 2023, an average UK earner on £30,000 a year would have paid £174 less in tax next year. However, they will still benefit from Kwarteng’s abolition of the 1.25 percentage point increase to national insurance which Hunt has kept in place, saving them around £218 next year.
“A higher earner on an annual salary of £100,000 will now pay £377 more in income next tax year, while benefiting by more than £1,000 from Kwarteng’s previous national insurance hike reversal.”
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Who pays income tax?
How much someone pays in income tax is dependent on how much of their income is above the personal allowance and where it falls within the tax brackets.
As it stands, the standard Personal Allowance for taxpayers is £12,570, and sums below this threshold are not taxed.
Above the Personal Allowance, there are three tax bands: the basic rate, the higher rate and the additional rate.
Under the basic rate, someone’s income is taxable at 20 percent if it is between £12,571 to £50,270. For the higher rate, a person’s income is levied at 40 percent if it is between £50,271 to £150,000. The additional rate is taxable at incomes over £150,000.
How much was the income tax cut?
Under the previous Chancellor’s plans, income tax would have been cut at the basic rate from 20 percent to 19 percent.
Now the plan is scrapped, an individual who is earning £20,000 a year would pay £1,486 a year in tax.
For context, this is £74 more than what someone would pay if the basic rate of income tax was cut.
On top of this, a person on £50,000 a year would pay £7,486 in income tax which is £374 more.
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Why is income tax cut being scrapped?
Negative market reactions to the previous mini-Budget is the primary reason why this U-turn is taking place.
The Government has received criticism for cutting both income and corporation tax at the same time, which was considered by many as not being fiscally sound.
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, broke down what such a reversal in the Government’s income tax plans would look like.
Ms Coles explained: “It would save the Government £5billion, on top of the £2billion saved by the u-turn on higher rate tax and around £18billion added to the pot from the corporation tax rise.
Mr O’Connell explained: “The light at the end of the economic tunnel has now been extinguished by this Chancellor.
“Millions of hard-hit households who were desperate for an income tax cut are now facing many more months of financial misery. To get a grip on this crisis, the Government needs to lay out a serious plan for necessary spending reductions, including means-testing energy support measures.”
On the impact on the private sector, Jamie Hawley, a Corporate and Commercial partner at legal firm Aaron & Partners, said: “This is a true mini-Budget bonfire.
“Businesses will be praying today’s statement by the Chancellor, which tears up almost everything announced by the previous Chancellor, does bring that much-needed certainty. Following the mini-Budget almost a month ago, many will have started to make plans factoring in the corporation tax freeze, changes to the basic rate of income tax, and other measures.”