45p Income Tax Rate cut reversed.

The proposed scrapping of the 45p rate of Income Tax from April 2023 will not now go ahead, the reversal being announced only 10 days after the Mini Budget in which the cut was announced. The 45p rate is payable on taxable incomes of over £150,000.

The Chancellor made the announcement via his Twitter account this morning.

A Treasury statement followed this afternoon.

The reversal in policy is due to adverse reaction by the markets, MPs and the media in particular to the proposal. In his Twitter statement, the Chancellor said he had listened to people's reactions.

Also announced in the Mini Budget was that from April 2023 the basic rate of Income Tax would be cut from from 20p to 19p. There is no mention of this in the Chancellor's Twitter statement, so we must presume for the moment that this is continuing, along with all the other Mini Budget announcements.

Cutting the 45p rate had put pressure on the Scottish Government to cut its top rate of 46% for income over £150,000. That pressure will now disappear.

Dividends tax

There will be an impact on the dividends tax, in that abolishing the 45p rate would have reduced the additional rate of income tax (38.1% from April 2023) on dividends down to the upper rate of 32.5%, a saving of 5.6% for those affected.

This may have led director/shareholders in private companies to have considered delaying the payment of dividends until after 5 April 2023 to save tax.

That incentive is no longer there, although there is still the proposed cut of 1.25%  from April for all rates of the dividends tax, i.e. from April 2023 the rates of dividend tax will be reduced back to their 2021/22 levels of 7.5%, 32.5% and 38.1%.

There may be non-tax reasons for delaying the payment of a dividend which need to be considered before taking any action, or choosing not to act.

As corporation tax due on directors’ overdrawn loan accounts is paid at the dividend upper rate, it will also reduce to a 32.5% charge for loans made on or after 6 April 2023.

Fiscal drag

Fiscal drag is caused by tax allowances and thresholds remaining frozen, whilst incomes increase. This results in more income being brought into higher rates of tax purely through stealth.

Back in March 2021, the then Chancellor announced that personal allowances and income tax thresholds would be frozen until 2026.

A report by the House of Commons library revealed that this freezing means that an extra 1.25m people will be dragged into the 40% tax bracket due to wage and price inflation. The report also predicts that around 1.5m people on low wages will be dragged into paying the basic level of income tax.

According to the OBR, if there was no freeze then by tax year 2025/26 the higher rate threshold would have increased from its current £50,270 to £56,270 and the personal allowance would have increased to £14,070 from its current £12,570.

It remains to be seen whether the current Chancellor will seek to alleviate the impact of this stealth taxation created by his predecessor.

Autumn Budget

Following on from the Mini Budget, it was announced that there would be an Autumn Budget on 23 November 2022 in which more tax measures would be announced as well as proposals to cut regulations to boost growth.

This was then changed to 31 October 2022.

The Chancellor is calling it a Medium-Term Fiscal Plan. He has also said there will be a Budget in the spring of 2023.

Before the Autumn Budget, the Government also plans to make 8 announcements on childcare, immigration, business red tape, housing, mobile broadband, energy, financial services and agriculture.

Further information

As more information becomes available, we will bring it to you. If you would like to discuss the impact of the Mini Budget on your personal tax affairs or on your business, please contact your usual Bishop Fleming advisor.

[Gary Mackley-Smith]