Clearly removing the bankers’ bonus cap will have been one aspect of why the Budget will have spelled good news for many in the Square Mile, but a slew of other tax changes also favour those on higher salaries.
To start with, the abolition of the top rate of income tax will benefit around 1.9 per cent of the UK’s highest earners from April 2023. Kwarteng will be hoping, somewhat counterintuitively, that it will also increase the tax take for the Treasury.
For many additional-rate taxpayers, earning more than £150,000, the abolition of the 45 per cent rate will significantly reduce their income tax bill. Someone earning £175,000 will take home an additional £1,250 a year, which increases to £3,280 if you include the government’s U-turn on the 1.25 percentage point national insurance hike.
Meanwhile, a £250,000 a year earner will get almost £8,000 extra from these reforms. Those earning £500,000 a year will have a whopping £17,500 in take home pay from the abolition of the 45 per cent rate, which ups to £23,592 with the NI reversal include.
Impact on take home pay of scrapping the 45% income tax band and reversing NI
| Salary | 45%-40% | Reducing NI by 1.25% | Total |
| £150,000 | £0.00 | £1,717.88 | £1,717.88 |
| £175,000 | £1,250 | £2,030.38 | £3,280.38 |
| £200,000 | £2,500 | £2,342.88 | £4,280.38 |
| £250,000 | £5,000 | £2,967.88 | £7,967.88 |
| £300,000 | £7,500 | £3,592.88 | £11,092.88 |
| £400,000 | £12,500 | £4,842.88 | £17,342.88 |
| £500,000 | £17,500 | £6,092.88 | £23,592.88 |
Scrapping the additional-rate tax band could however be harmful for higher earners’ pension savings, as under the current rules they can claim tax relief on pension contributions at their nominal income tax rate.
So it could mean their pension tax relief falls to 40 per cent from 45 per cent, subject to the tapered annual allowance. This therefore could be an opportune moment for high earners to max out pension contributions before the April 6 cut in tax relief.
With the UK government facing a black hole in its finances following the pandemic and the energy price guarantee, Kwarteng is backing the theory that you can cut taxes to increase revenue, and he may be proved to be correct, as some people would no longer keep their income down to avoid the additional rate. Truss and Kwarteng are sending a Conservative signal that they want people to do well.
Stamp duty
Elsewhere, the government also tabled a stamp duty cut, which again may prove to benefit the wealthy while curtailing the chances of those unable to afford a property of eventually being able to. The stamp duty cut will likely once again bring back frenzied demand to the property market, and the laws of supply and demand dictate that when there is little stock but high demand prices rise.
Unfortunately, the UK is suffering with a significant lack of stock.
We only need to look back a matter of months to see what a transformational impact stamp duty holiday had on the market, and unless more stock is built quickly, this will spell bad news for many.
However, increasing stock levels still takes time to feed through to house prices, and in the short term it is likely that we are going to see another surge in prices putting the dream of home ownership further from reality for most of ‘generation rent’, but further lining the pockets of homeowners.
Truss is gambling hugely with these tax-cutting measures. If they are not seen to make any difference or compound the economic problems currently facing the nation, voters will not forget this mini-Budget, which many will understandably see as a giveaway to the rich.
In two years’ time, when there is another general election, we could see many people vote with their feet if this plan for growth does not pay off.
Rachel Griffin is tax and financial planning expert at Quilter
