Income Tax Will Reduce In April 2023

The recent Budget shocked many of us as the Chancellor announced that the Government would be reducing both the basic rate of tax and the highest ‘additional’ rate from the 6th of April 2023.

How Will Income Tax Change Next Year?

Currently, around half of taxpayers only pay the basic rate, which means they will benefit from it being lowered from 20% to 19%. Previously arranged to come into effect in 2024, this cut has been moved forward a year to help with the cost of living crisis.

Along with changes to the basic rate, the income threshold at which taxpayers begin paying 40% tax and the personal allowance have both been frozen for 5 years, ending in April 2026. As inflation is now at almost 10%, this reduces the real value of tax-free personal allowances and drags more people into the higher rate tax bracket.

Those who earn higher salaries will benefit the most from this year’s Budget. The 45% additional tax rate that applies to income over £150,000 will be abolished from the 6th of April 2023. The 40% rate will continue to apply to all higher income levels. From April 2023, these taxpayers will also now be eligible for a £500 savings allowance for the first time.

Do The Changes Only Apply To England?

As both Scotland and Wales have their own Governments, we are yet to discover whether they will apply tax cuts to match those in England from 2023. The Scottish Government, in particular, sets its own income tax rates on earnings and profits (not savings and dividends); these are currently between 19% and 45%. The Scottish Budget for 2023-24 will be announced later this year.

There Will Also Be Cuts To Dividend Income Tax

The Chancellor has also chosen to reduce the tax payable on dividend income by 1.25 percentage points. This comes into effect from the 6th of April 2023 and will apply to the whole of the UK. From April 2023, the rates of income tax in England and Northern Ireland will be: