What is income tax? Who pays it, how much would 1p cut to basic rate save you - as Jeremy Hunt confirms U-turn
The new Chancellor has scrapped the 1p cut from the basic rate of income tax despite Kwasi Kwarteng bringing the measure forward to 2023 in his mini-Budget
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The ex-Health Secretary announced another U-turn on the disastrous mini-Budget on Monday (17 October) to restore market confidence. The 1p cut to income tax was first announced by Rishi Sunak in March with a view of it being put in place in 2024.
The measure was brought forward to 2023 by Kwasi Kwarteng in his mini-Budget announced in September. Now Jeremy Hunt has said the 1p cut to income tax has been delayed "indefinitely". Here we explain what income tax is, who pays it, and how much a 1p cut would save you?
What is Income tax?
You pay income tax on your earnings above a certain threshold. It is charged on most types of income, including your salary and profits if you’re a business owner. Income tax is separate to national insurance.
Who pays it?
Almost everyone gets a personal allowance of tax-free income - for the 2022/23 tax year, you can earn up to £12,570 before you start paying. This means if you earn less than £12,570, you currently pay no income tax.
The majority of basic-rate taxpayers currently pay 20p in the pound on earnings between £12,571 and up to £50,270. This was meant to drop to 19p in 2023. But this change now won’t go ahead. Higher earners who have an income between £50,271 pay 40% income tax above this threshold, up to £150,000.
Any earnings above £150,000 are taxed at 45%. This top tier rate of tax is now staying in place, after Kwasi Kwarteng’s plan to scrap it was overturned. Your personal allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000. You also have separate tax-free allowances for savings interest and dividends, if you own shares in a company.
How much money would a 1p cut save you?
Figures released by Interactive Investor show the 1p cut would have a bigger effect on higher earners.
These are the figures:
- £20,000 salary: £74 saved
- £30,000 salary: £174 saved
- £50,000 salary: £374 saved
- £80,000 salary: £674 saved
- £100,000 salary: £874 saved
It would have amounted to tax savings of £74 for someone earning £20,000. This increases to £174 for a worker on £30,000 and £374 for someone with a salary of £50,000. The figure is £674 and £874 for employees with an income of £80,000 and £100,000, respectively.