A woman calculating her taxesimage source, Getty Images

The government has announced changes to the income tax rules, meaning millions of people are paying more.

Income tax is the largest source of revenue for the government.

What changes have been announced?

Chancellor Jeremy Hunt will freeze the personal allowance of £12,570 until April 2028.

Anyone who earns more than that will pay more taxes.

It also lowers the threshold that allows people to pay higher taxes in the same period. They have been frozen until 2026.

Freezing the threshold means that the tax bracket stays the same, even if people’s wages go up.

As wages rise, people pay a greater proportion of their income in taxes, and more people move into higher tax brackets. This is sometimes called fiscal drag.

The Office for Budget Responsibility – which independently evaluates the government’s economic plans – estimates that the threshold of the freeze until 2028 will create 3.2 million new taxpayers, and this means that 2.6 million more people pay higher taxes.

Mr Hunt also announced that the threshold for paying the highest rate of tax will fall from £150,000 to £125,140 from April 2023.

What income do you pay?

You pay state taxes on your employment income and self-employment profits.

Income tax is also due on certain benefits and pensions, rental income, and returns from savings and investments in excess of compensation. some.

These rules apply in England, Wales and Northern Ireland. Scotland has different rules to the rest of the UK.

What is the basic income tax rate?

You pay a rate of tax on income between £12,571 and £50,270 a year.

The base rate is 20%, so one-fifth of the money you earn between these amounts goes to the government.

What is the higher income tax rate?

The higher tax rate is 40%, and is payable on income between £50,271 and £150,000 per year. The top of this band will drop to £125,140 from April 2023.

Once you earn more than £100,000 a year, you start losing your tax-free allowance.

You lose £1 of your personal allowance for every £2 your income exceeds £100,000, meaning if you earn more than £125,140 a year you no longer get personal allowance.

How much is the extra charge?

According to the current rules, the rate of additional tax is 45%, and it is paid on the amount of more than £150,000 per year.

This will drop to £125,140 in April 2023.

The government says about 660,000 people pay the extra rate.

What is National Insurance?

For workers, National Insurance is similar to income tax in many ways – it’s also a tax on your earnings.

It is the second largest source of revenue for the government.

It operates at some of the same thresholds as income tax.

You don’t pay this on the first £12,571 you earn a year. It is then charged at 12% of income up to £50,271, and 2% of income above that.

Mr Hunt confirmed that the national insurance threshold would also remain frozen until April 2028.

It is not paid by people over the state pension age even if they are still working.

Employers must also pay national insurance.

How are taxes different in Scotland?

  • No tax is payable on the personal allowance of £12,570
  • £12,571 to £14,732 starting rate 19%
  • £14,733 to £25,688 Scottish rate 20%
  • £25,689 to £43,662 average 21%
  • £43,663 to £150,000 higher rate of 41%
  • Top rate of 46% over £150,000
  • The personal allowance is reduced by £1 for every £2 earned over £100,000.

The Scottish Government will set the tax and expenditure for 2023/24 on 15 December.

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