In a surprise move, the Chancellor announced plans to abolish the additional 45% rate of income tax on annual income above £150,000 from 6 April 2023
This means that all annual income above £50,270 will be taxed at 40%, the current higher rate of income tax. Removing the income tax additional rate will cut tax for around 660,000 individuals from April, with a £625m hit to the tax take in 2023-24.
Additional rate taxpayers will account for 36% of all income tax liabilities in 2022-23 (£89.2bn of £251bn). This has increased from 23% (£34.5bn of £152bn) in 2010-11.
Currently the 45% rate is higher than the top national rate of income tax for G7 countries like the US, Italy and Norway, the Chancellor Kwasi Kwarteng said.
The additional rate was reduced in 2013 to 45% after former Chancellor Gordon Brown temporarily increased the rate to 50% after the financial crash. Pre-April 2010, the top rate of income tax was 40%.
Alison Hill, tax partner at PwC, said: ‘The abolition of the top rate of income tax was one of the biggest ‘Budget’ shocks in recent memory. If this was a ‘mini-Budget’ it begs the question what is the Chancellor saving for the full Budget?
‘The abolition of the 45% rate is by no means the most costly of the Chancellor’s announcements - at a still significant roughly £2bn a year - but it’s a key component in his aspiration to make the UK a ‘nation of entrepreneurs’. This unexpected move was also clearly designed to show the seriousness of the Chancellor’s intent to improve the growth potential of the UK economy.’
The tax cut will apply to the main rates which apply to non-savings, non-dividend (NSND) income for taxpayers in England, Wales and Northern Ireland; the savings rates which apply to savings income for taxpayers across the UK; and the default additional rate which applies to non-savings and non-dividend income of any taxpayer that is not subject to either the main rates or the Scottish rates of income tax.
The dividend additional rate will also be removed to align with the dividend upper rate, which is being reduced to 32.5% from 6 April 2023.
From April 2023 additional rate taxpayers will also be given a personal savings allowance of £500, in line with higher rate taxpayers. This was not previously available to them. This gives them up to £500 tax free allowance on interest on savings.