The chancellor has reduced the threshold for the additional rate of tax in today's Autumn Statement.
Giving a statement to the House of Commons this morning (November 17), Jeremy Hunt said from April 2023 the rate at which people pay the additional rate of income tax, charged at 45 per cent, will change from £150,000 to those earning over £125,140.
Currently, anyone earning between £50,271 and £150,000 pays 40 per cent in tax, and earners above this pay 45 per cent.
The changes mean that anyone earning between £125,140 and £150,000 will pay 5 percentage points more tax on their income.
Tom Minnikin, partner at Forbes Dawson, said this is a "huge climb down" from the 'mini' Budget, as the chacellor will have "done his sums" and worked out that squeezing a bit more out of this income bracket is unlikely to lead to major changes in taxpayer behaviour.
"Those who can manage their incomes are probably already limiting their remuneration to £100,000 - the threshold at which the personal allowance starts to be withdrawn..therefore, the policy is more likely to affect workers whose incomes are fixed."
Paul Barham, partner at Mazars said this made tax planning "even more critical".
"If salary sacrifice is an option through your employer, consider using it to reduce your taxable earnings or think about increasing your pension contributions.
"Benefits like a season ticket loan, company car, cycle to work scheme or claiming tax-free childcare can also be used cut your taxable earnings.”
Previous changes
The former chancellor, Kwasi Kwarteng, had previously scrapped the 45p rate, however this was swiftly reversed after ructions in financial markets and rebellion by some Tory MPs.
The additional rate of income tax, which is 45 per cent on income over £150,000, was to be scrapped completely from April 23, 2023.
This meant there would have been a single higher rate of income tax of 40 per cent.
However, the news caused significant fluctuations in financial markets, as there was concern that most of the measures introduced would be funded by £45bn in borrowing.
The pound crashed, hitting $1.035 against the dollar, and gilts soared, prompting the Bank of England to intervene, warning about a “material risk to UK financial stability”.
sally.hickey@ft.com
