Chancellor Rishi Sunak presented his Budget on Wednesday 23 March 2022.
This was against a backdrop of significant increases in inflation and consequently falling living standards together with the conflict in Ukraine.
The Budget is, of course, one of the government’s keynote speeches each year. Reflecting this and the present circumstances, the Chancellor announced his “Tax Plan: My Vision for a Lower Tax Economy” which, with parallels to his Budget for the pandemic, had a three part plan comprising:
- helping families with the cost of living;
- supporting growth in the economy; and
- ensuring the proceeds of growth are shared fairly.
The Chancellor’s speech was long on the economy addressing investment and economic growth – in line with the government’s strategy for reducing public debt as a proportion of Gross Domestic Product, and short on tax measures.
Whilst we welcome a stable tax environment, it is a reflection of the bad hand which the Chancellor has been dealt since his appointment.
Over the course of the next few weeks, we’ll be posting a series of insight in respect of the tax measures and changes introduced and how these may affect you, your family and your business. And we start with a quick look at income tax and fuel duty.
Income Tax
Personal Tax
The importance of understanding the tax allowances, bands and rates is to optimise your marginal rate of income tax so that your income does not unnecessarily fall into a higher rate of income tax.
The key ways to optimise your marginal rate of income tax are to:
- accelerate or defer income
- reallocate income
- make pension contributions
pay donations under Gift Aid.
The UK personal allowance, tax rates and bands for the tax year 2022/23 were announced by the Chancellor in the October 2021 Budget and there is no change to these in the 2022 Budget.
The Personal allowance
The personal allowance is currently £12,570 and will be frozen at £12,570 for the tax years to 2025/26.
Tax bands and rates
The basic rate of tax is 20%.
In 2022/23 the band of income taxable at this rate is £37,700 so that the threshold at which the 40% band applies is £50,270 for those who are entitled to the full personal allowance. The bands of tax are also frozen for the tax years to 2025/26.
Individuals pay tax at 45% on their income over £150,000.
Effective 60% tax rate
There is an effective 60% tax rate for those with income over £100,000. The personal allowance is reduced by £1 for every £2 of income above £100,000 so that for the current tax year there is no personal allowance where your income exceeds £125,140.
Tax on savings income
Savings income is income such as bank and building society interest.
The Savings Allowance applies to savings income and the available allowance in a tax year depends on the individual’s marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an allowance of £1,000. For higher rate taxpayers the allowance is £500. This allowance is not available to additional rate taxpayers.
Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income less allocated allowances and reliefs) exceeds £5,000.
Tax on dividends
The first £2,000 of dividends are chargeable to tax at 0% (the Dividend Allowance). For 2022/23 and subsequent tax years the rate at which dividends received above the Dividend Allowance are taxed has increased across all rates by 1.25% to the following rates:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers.
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.
To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.
Future income tax reduction
The Chancellor announced the reduction in the basic rate of income tax for non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland to 19% from April 2024.
Fuel Duty
In a populist measure to help all motorists, fuel duty for petrol and diesel is cut by 5 pence per litre across the whole of the UK. This measure took effect from 6 pm on 23 March 2022 and is in place for 12 months.
In our next post about the Budget, we’ll look at the recent changes to National Insurance.
You should contact us before taking any action as a result of the contents of this summary.