Income tax UK: 2023/24 rates explained - why band freeze means you pay more and how personal allowance works

Chancellor of the Exchequer Jeremy Hunt announced an effective tax hike in his Autumn Statement, which is coming in from April 2023

Jeremy Hunt’s Spring Budget contained many key announcements, including extra (although, not immediate) support for parents of young children in England, and news that government energy bills support will continue unchanged for three months.

But the Chancellor’s speech was just as much about what he didn’t tell us as what he did. While he made no specific mention of changes to big personal taxes, several major hikes are on their way from April.

As well as allowing many local authorities to up council tax by up to 5% without a referendum this spring, Hunt’s previously announced changes to income tax and capital gains tax are set to kick in over the coming weeks. It means the UK tax burden is set to reach its highest level since World War Two, according to independent public body the Office for Budget Responsibility (OBR).

Analysis by the Resolution Foundation think tank shows UK households will be paying an extra £4,200 in tax on average by the 2027/28 financial year compared to before the pandemic. At the same time, typical disposable incomes per household will remain lower than pre-Covid times over this period, and even £1,800 down on where they would have been had the anaemic growth of the 2010s continued.

So, how is income tax changing from April - and why does it mean you will be paying more to the Treasury?

What is income tax?

Income tax is a tax every working person in the UK has to pay, so long as they earn an annual salary above a certain threshold. What you pay depends on how much you earn.

For most workers, money they earn over £12,570 - known as the ‘personal allowance’ - is exposed to income tax. In England, Wales and Northern Ireland, income tax is currently split into these bands:

  • Up to £12,570 = 0%
  • Between £12,571 to £50,270 = 20%
  • From £50,271 to £150,000 = 40%
  • Over £150,000 - 45%

The top rate of the tax is also known as the ‘45p rate’ as people who earn above the £150,000 threshold pay 45p in every pound back to HMRC. The bands differ in Scotland, which has a starter rate of 19% (for incomes between £12,571 and £14,732) and an intermediate rate of 21% (for those earning £25,689 to £43,662). Its higher rate (above £43,663) is 41% and its top rate (£150,000+) is 46%.

Across the UK, anyone who earns more than £125,140 does not get a personal allowance. It means all of their income is exposed to the taxman.

According to the OBR, income tax generated an estimated £213.2 billion for the public purse in the 2021/22 financial year. This figure was almost a quarter (24.7%) of the Treasury’s annual income from taxes.

How is income tax changing?

The biggest change with income tax is in fact that it isn’t changing a great deal. In the Autumn Statement, Jeremy Hunt announced he would be freezing income tax bands for regular earners and exposing more higher earners to the top rate of the tax.

Freezing these thresholds is an effective tax hike. Wages are still growing on average - albeit at a rate that’s well-below the rate of inflation, which means we’re all seeing a fall in our real-terms income.

According to data published on Tuesday (14 March) by the Office for National Statistics (ONS), private sector pay grew 7% while public sector salaries only went up 4.8% over the three months from November 2022 to January 2023. During this period, inflation remained above 10%, with the ONS estimating overall real-terms pay fell back 3.2%.

The OBR has said that the threshold freeze will amount to a 4p income tax hike in every pound for UK workers. Meanwhile, analysis by The Times suggests another 3.2 million people will end up paying income tax as a result of the policy.

As well as keeping the bands where they are for most taxpayers, Jeremy Hunt also cut the top rate threshold in his Autumn Statement. From April, the 45p rate will apply to those earning £125,140 and above.

It came after his predecessor, Kwasi Kwarteng, sought to abolish the top band in his mini budget. The move proved to be highly unpopular given it was essentially a tax cut for the UK’s richest people at a time when much of the population was struggling to get by as a result of the cost of living crisis. It soon became one of Liz Truss’s first u-turns during her short reign as Prime Minister.