If you live in the UK you might have heard of mini budged recently. This is where the new chancellor Kwasi Kwarteng announced financial changes that impact lives of people living in the UK. Personal tax is one of the topics that got impacted.
Reading that paragraph above you might got slightly concerned. However, the good news for you – the tax actually got reduced. This isn’t something that you hear frequently happening.
The other topic that got a lot of attention – changes to the stamp duty. And once again – the changes there were positive for people looking to buy their first or next home.
Below I will give a quick summary of the key changes to the tax brackets so you know what benefits to expect. However, there is one thing to keep in mind – these do not kick in straight away. Unfortunately, you will have to wait before you will see an actual benefit in your take home pay cheque.
current personal tax brackets
There are currently 4 tax brackets in the UK. As you can see in the image below – it starts with no need to pay any tax if you are earning below £12,570. The upper bracket is currently sitting at 45% if you are earning over £150,000.
There is a further complication to add to this. If you earn over £100,000 – you lose £1 out of your tax free allowance for every £2 you make. This process goes all the way up to when your tax free allowance is reduced to £0.
The above however is due to change as of April 2023. Not the tax free allowance unfortunately. Below I will give a summary of the key changes you can expect to see hitting your bank account next year.
changes to lower personal tax bracket
The first change you will see is the change to the Basic Rate. This is going to reduce from the current 20% to 19%.
The question you probably have – what does it mean in the actual take home income. The maximum you can benefit through this is £377 per year.
This doesn’t sound a lot, especially the moment you start braking it down in monthly benefits. The maximum you can benefit is just over £30 per month in your take home salary.
The above however isn’t what every single person will get. The above applies only to those earning £50,270 or above. The easiest way to understand the benefit you can expect to receive in your bank account is – take your annual salary, subtract £12,570 from it and multiply the difference by 0.01 (or 1%).
The alternative to the above – for every £1,000 you get above £12,570, you will get £10 annual benefit. Or, for every £100 above the tax free allowance you can expect an annual benefit of £1.
This doesn’t sound a lot, I have to agree with that!
changes to additional tax bracket
For those of you who are fortunate enough to be earning above £150,000 the benefits will be somewhat more sizeable. For every £1,000 above the current limit you can expect to gain £50 in your bank account.
This is obviously on top of the benefit you will get from the reduction in the basic tax. So you will also get the £377 from the basic tax and continue benefiting from tax benefits at upper tax brackets.
For example, if you are earning £200,000 – you will get the £377 from basic tax bracket change + £2,500 from the change in the additional tax bracket.
national insurance is also going to reduce
On top of the above, anyone who currently earns above £12,570 has to pay national insurance on top of taxes. As of April 2022, national insurance has increased for majority of employees by 1.25%.
This is a significant increase I have to say. Anyone earning £50,000 per year would have to pay £468 extra NI per year. Not sure the service of NHS has increased by the same amount though…
There is a change coming as of 6th of November. The national insurance increase will no longer be a thing. What this means – anyone earning over £12,570 per year will benefit from 1.25% less NI payments.
Below is an image I found on BBC explaining the rough benefit you can expect to hit your bank account as of November this year. Please keep in mind – the fingers there are an annual rather than monthly benefit.
summary
This is an interesting topic. While government has “tried” to increase the take home salary for most employees, the biggest benefit will be for those who are already earning the most.
Don’t get me wrong, getting any benefit is a nice thing. I am personally not in favour of the tax cuts at the upper levels. People on those salaries are already earning disproportionately and getting even more into their bank account was not necessarily needed.
The positive I can see though – anyone earning above £12,570 will get a 1.25% benefit as of next month and then an additional 1% as of April 2023. 2.25% increase in take home salary is definitely not a bad thing.
If you are interested to play with the numbers yourself – there are many online calculators that can help you calculate your net salary based on the gross you are earning. These will include any additional payments you might be making, e.g. student loan repayments.
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