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How much will the income tax and NI cuts save you?

The basic income tax rate will be cut to 19p next April, leaving the average worker £170 a year better off

It was dubbed a “mini-budget”, but in reality it was far from small. In his first speech as Chancellor, Kwasi Kwarteng announced aggressive tax cuts not seen since the 1970s.

Kwarteng has pulled two rabbits out of the mini-budget hat: the reduction of the basic income tax rate to 19 pence and the abolition of the additional 45 pence income tax rate from next April .

This means that all high earners over £50,270 will pay 40% tax, instead of the current rate of 45% which is over £150,000. The basic rate of tax will be reduced from 20p to 19p next April for income between the tax-free personal allowance of £12,570 and the higher rate threshold.

The scrapping of a National Insurance hike from earlier this year was also confirmed.

We look at what the income tax and National Insurance changes mean for people, how much they can save… and whether the plan will work to stimulate the economy.

The basic income tax rate will be cut to 19p next April, leaving the average worker £170 a year better off

The basic income tax rate will be cut to 19p next April, leaving the average worker £170 a year better off

How much will you save on income tax?

Gross salary Annual income tax savings from 2023/4
20,000.00 £74.30
30,000.00 174.3
40,000.00 274.3
50,000.00 374.3
75,000.00 377
100,000.00 377
150,000.00 377
200,000.00 2,877.00
500,000.00 17,877.00

The Chancellor brought forward the planned 1p cut in the base rate to April, which the government says will ‘encourage enterprise and hard work and simplify the tax system’.

The basic income tax rate will now increase from 20p to 19p from April 2023 instead of April 2024.

The government estimates this will save households an average of £170 a year.

According to calculations by accountants Moore Kingston Smith, people earning £20,000 a year will save £74.30 a year from the income tax cut alone, while those earning £50,000 will be 374% better off. £.30.

The greatest savings to be made, however, concern the highest incomes, as the Treasury abolishes the additional income tax rate entirely. They will now pay 40% instead of 45%.

This means someone earning £200,000 a year will earn £2,877 a year under Kwarteng’s proposals, while those earning £500,000 will save nearly £18,000 a year.

How much will you save on national insurance?

Gross salary Annual NI saving from 2023/4
£20,000 £143.57
£30,000 £216.49
£40,000 £289.40
£50,000 £362.32
£75,000 £544.61
£100,000 £726.90
£150,000 €1,091.49
£200,000 £1,456.07
£500,000 £3,643.57
Figures compiled by Moore Kingston Smith, based on comparison between 2023/4 and 2022/3

The National Insurance hike introduced earlier this year will be rolled back from November, putting more money straight into the pockets of millions.

Those earning £20,000 will save £143.57 from the NI inversion, nearly double what they will save from the income tax change.

Those earning £150,000, who will benefit from the removal of the additional tax rate, will save £1,091 from the NI reversal alone.

People earning £500,000 will save just over £3,500.

Those who do not pay national insurance, the vast majority of whom are pensioners, will not benefit from it.

How much will you save with the two tax cuts?

Gross salary Annual income tax savings from 2023/4 Annual NI saving from 2023/4 Increase in annual after-tax income
20,000.00 74.3 143.57 217.87
30,000.00 174.3 216.49 390.79
40,000.00 274.3 289.4 563.7
50,000.00 374.3 362.32 736.62
75,000.00 377 544.61 921.61
100,000.00 377 726.9 1,103.90
150,000.00 377 1,091.49 1,468.49
200,000.00 2,877.00 1,456.07 4,333.07
500,000.00 17,877.00 3,643.57 21,520.57
Figures compiled by Moore Kingston Smith, based on comparison of Income Tax 2023/4 and NI vs 2022/3

The inversion of the NI and the new income tax rate will put more money in people’s pockets, although the greatest savings will be made among the highest earners – this is because they are paying more National Insurance and the effect of the removal of the 45p.

Someone earning £200,000 will save £2,877 a year. This rises to £4,333.07 if you include the reversal of NI’s 1.25 percentage point increase.

A person earning £500,000 will earn £17,877 more with the new 40% rate, which rises to £21,520.57 with the NI reversal.

By comparison, someone earning £20,000 will save just over £200 a year.

Britain’s 60% tax rate remains

Top earners over £150,000 got a big tax break today, but further down the ladder some face an effective tax rate of 60 per cent and are still waiting for something to be done about it topic.

A quirk of the UK tax system means those earning between £100,000 and just over £123,000 are already paying more than those earning over £150,000.

Those earning over £100,000 lose their tax-free personal allowance at a rate of £1 for every £2 earned above the threshold, effectively giving them a marginal tax rate of 60% for each additional pound earned between £100,000 and £125,140.

The Treasury confirmed to This is Money today that despite the removal of the 45p tax, this effective rate of 60p will be maintained.

There has also been no change to the abolition of Child Benefit for those earning between £50,000 and £60,000, which can give those with a child a marginal tax rate of 51%, in depending on the advantage they lose.

Why is the government cutting taxes now?

The UK tax system is complicated and there have long been calls for the system to be simplified. But given the energy crisis and possible looming recession, now might seem like a strange time to cut taxes.

This marks a significant change from the fiscal policies of the previous government, with Paul Johnson, director of the Institute for Fiscal Studies, saying: “It has been half a century since we have seen tax cuts announced at this ladder.”

Rachael Griffin, financial planning expert at Quilter, said: ‘With the UK government facing a black hole in its finances following the pandemic and guaranteed energy prices, Kwarteng argues that the theory that you can cut taxes to increase income and it can be proven to be correct because some people would no longer keep their income low to avoid the additional rate.

“Truss and Kwarteng are sending a conservative signal that they want people to succeed.”

Criticism is already directed at the government for its decision to abolish the additional tax rate of 45 percent.

“Removing the cap on bankers’ bonuses and removing the 45% tax rate will improve the attractiveness of the UK as a place where financial services can locate their highest earning employees,” says Tim Stovold, Head of taxes at Moore Kingston Smith. “Today’s tax announcements will disproportionately benefit very high earners.”

Will lowering taxes help the economy?

Growth was at the center of today’s budget, with the Chancellor’s package aimed at tackling the UK’s low productivity.

The tax cuts were among the measures introduced by Kwarteng to signal a “new approach for a new era” and to end a “vicious cycle of stagnation”.

But is this the most effective way to grow the economy?

“The government is betting that a historically large package of tax cuts can propel the UK economy to a higher long-term rate of growth. And that growth will be needed if the Chancellor hopes to balance the books, as the plans announced today require a substantial increase in borrowing,” said Ed Monk, associate director of personal investments at Fidelity.

Many households will see an immediate increase from the measures announced today, but any savings will likely go to higher energy bills and mortgage payments.

“Although the government has helped pay energy bills, households are still facing a dramatic increase. So whatever they can now save in income tax, national insurance and for movers, stamp duty, they are still unlikely to be earmarked for discretionary spending,’ Becky O said. ‘Connor, Head of Pensions and Savings at Interactive Investor.

“Indeed, while inflation remains high, confidence is low and interest rates rise, if reserve money appears at the end of the month, it could well go directly into the accounts of savings and investment rather than in the economy.Most importantly, these changes seem unlikely to reverse inflation, which could take as much from households as these tax cuts free up.

Markets also don’t seem convinced that the Chancellor’s plan will bring the economy back to life anytime soon.

UK government bonds were down sharply and the pound fell after the mini budget.

That will worry Treasury officials as the cost of servicing the country’s debt skyrockets as government borrowing increases and tax revenue declines.

Will Stevens of Killik & Co said: ‘The Government is clearly aiming to improve the UK’s competitiveness against rival economies, encourage entrepreneurship and increase discretionary spending.

“However, the longer-term effect of this could put further pressure on already high levels of inflation and there are fears that future generations will have to foot the bill for the tax cuts made now.”

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