Chancellor abolishes 45% rate of income tax

This was one of the “proper rabbit out of the hat moments” arising from the mini (or not-so-mini) budget.

The Chancellor, Kwasi Kwarteng said “I’m not going to cut the additional rate of {income} tax today, Mr Speaker. I’m going to abolish it altogether”.

This means that, from April 2023, there will no longer be an additional 45% rate of income tax. Instead, we will have a single higher rate of income tax at 40%.

The Chancellor noted that the 45% rate is higher than the top national rate of income tax for G7 countries such as the US and Italy and is higher than social democracies like Norway.

It is predicted that scrapping the 45% rate of income tax will cost the Treasury approximately £2billion a year and that about 600,000 people will benefit from the change providing an average tax saving of £10,000 each.

Those who would have otherwise been additional rate taxpayers will, from April 2023, benefit from a Personal Savings Allowance of £500 (in line with higher rate taxpayers) which was not previously available to them.

The abolition of this additional rate is the Chancellor’s bid to simplify the tax system, make Britain more competitive by rewarding enterprise and work and incentivising growth. The Chancellor pointed out that this will return us to the top rate we previously had for 20 years (1989 – 2010).

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.

It will be interesting to see how these changes will impact trusts which are currently subject to the additional rates of income tax.

In addition, as part of the Government’s initiative to allow people to keep more of the money they earn, the Chancellor announced that the basic rate of income tax will be cut from 20% to 19% from April 2023, rather than April 2024, bringing the planned cut forward by 12 months.

As ever, only time will tell if the moves will drive growth and make Britain globally competitive.