The Chancellor’s statement included changes to rates and thresholds affecting individual taxpayers, which are much more wide-ranging than expected. The most significant changes are to national insurance, with the 1.25% increase being removed from 6 November, and to income tax, with the basic rate reducing from 20 to 19% from April 2023. The Government will also reverse the 1.25% increase to dividend tax rates from 6 April 2023.
The Chancellor also announced that the additional 45% rate of income tax would be abolished from 6 April 2023. Following heavy criticism, he subsequently announced, on 3rd October, that the 45% rate of income tax would remain in place.
Income tax – what has changed?
The reduction in the basic rate of income tax from 20 to 19%, originally planned to take effect from 6 April 2024, will be brought forward to 6 April 2023. The basic rate of tax on dividend income will remain unchanged at 7.5%. The basic rate of income tax on non-savings income will not change in Scotland, as this rate is set by the devolved government.
There will be a four-year transition period during which charities will still be able to reclaim 20% basic rate tax on gift aid donations and a one-year transitional period for relief at source on pension contributions, allowing schemes to continue to claim 20% basic rate relief.
How will the income tax changes be received?
The decision to bring forward the reduction in the basic rate of income tax had been rumoured before the Growth Plan announcement, but the proposed abolition of the additional rate band was unexpected.
The reduction in the basic rate of tax will benefit all taxpayers in England, Wales and Northern Ireland and it remains to be seen whether the devolved Scottish government, which has responsibility for setting income tax rates on non-savings income, will also reduce the basic rate.
Charities will welcome the transitional period during which they can continue to claim 20% tax relief on donations, as will pension savers. We await exact details of how this will impact on the relief claimed by higher rate taxpayers.
The additional rate band was introduced in 2010 and was initially 50%, before being lowered to 45% in 2013. The threshold remained at £150,000 throughout the period during which the band applied. Although relatively few taxpayers are subject to tax at this rate, the proposed abolition of the band garnered significant press coverage given that, as with a number of the measures announced, it is those on the highest levels of income who would benefit the most. The proposal was not widely well received and so the Chancellor’s confirmation that this abolition will no longer go ahead is likely to be welcomed by many.
National insurance contributions (NIC)
The Health and Social Care Levy (HSCL), which was to come into force on 6 April 2023, will be repealed. The temporary 1.25% increases to the rates of Class 1, 1A, 1B and 4 NIC from 6 April 2022 will be reversed from 6 November 2022. The increase to the Class 1 NIC primary threshold from 6 July 2022 will however be retained.
There has been no mention of proposed anti-forestalling measures, so some employers may have an opportunity to take advantage of the reduction in rates on 6 November by a short-term deferral of imminent scheduled payments to employees, for example of bonuses.
Income tax on dividends
Dividend tax rates were increased by 1.25% from 6 April 2022. The Government has confirmed that this increase in tax rates will now be reversed from April 2023.
From 6 April 2023, basic, higher and additional rates of dividend tax will, therefore, revert to their 2021-22 levels of 7.5% 32.5%, and 38.1% respectively.
The Government also initially confirmed that the additional dividend tax rate would be abolished from 6 April 2023,in keeping with the policy to remove the 45% additional rate of income tax applying to other sources of income. This decision has since been reversed.
It was anticipated that the Government would reverse the increased dividend tax rates, given that the increased rates were introduced together with, and set at the same amount as, the Health and Social Care Levy and the temporary increase to Class 1 National Insurance contributions.
It is interesting to note that dividend tax rates will not be reduced until 6 April 2023, whereas the corresponding 1.25% reduction to Class 1 National Insurance Contributions will apply from 6 November 2022. Those company owners, who are able to extract salaries, may wish to review their options in this interim period.
Conclusion
These changes will have an impact on all those who pay tax. The November NIC changes will be a challenge for payroll teams. We are currently expecting a further fiscal event in November, and though there may not be further changes to income tax and NICs at this time, the general direction of travel, in favour of a lower tax burden on individuals, is clear.
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