Proposed income tax for next financial year is changing once I again. There have been many proposed changes to this recently. Ever since Boris Jonson has moved on the new government has struggles to come up with a solid plan.
The latest set of news is that the change will impact the tax brackets rather than the actual percentage we pay. The change will impact only those earning over £125,000.
This is a fairly radical change keeping in mind that the original proposal was to abandon the additional tax bracket altogether. This however was announced by the previous government. There was no solid plan on how to fund the tax cut.
If you want to remind yourself of the changes that were previously proposed – these can be found here.
income tax bracket changes
The new government is looking for ways to boost its income to fund all the dept they currently have. As a result – they have proposed to tax higher earners more. This is the complete opposite of what was previously proposed.
The key change here – the proposal is to start taxing people with 45% starting at £125,140. This has previously been set at £150,000.
This change will boost the government taxes by significant amount. And while the previous proposals to reduce tax have been unethical – I sort of struggle to disagree with this one.
People on the lowest income are the ones the government should try and help the most. This proposal will achieve something similar to that.
The proposed change will in reality reduce the number of people who were previously in the higher tax bracket. They will get mover into the additional tax bracket at lower levels of income.
The biggest miss with this proposal in my view is not to address the issue of super wealthy. They are the people who previously were in the additional tax bracket.
While super rich will pay more tax – this will only be a lump sum rather than proportionately grow as their income keeps increasing.
This change is due to kick is as of April 2023.
how much more will you pay?
The key question many people will be asking – so how much more tax I will have to pay?
The answer is fairly simple – for every extra £1,000 you make over £125,140, the tax man will want additional £50 in tax.
The maximum amount that someone will have to pay extra is £1,243. This would be applicable to those currently in the additional tax bracket. So if we really think of the impact on these people – they won’t be paying that much more.
As I mentioned in the previous paragraph – the biggest issue is the fact that the extra income won’t be impacted by the proposed change more than it was before. What keeps happening as a result – the rich keep getting richer.
It doesn’t matter if you are currently earning £150,000 or £500,000 per year – the maximum extra tax you will pay will be fixed at £1,243.
If you want to learn more about how much tax you are actually paying – have a look at this tax calculator.
stealth income tax
There is a stealth tax that has been proposed unfortunately as well. The reason it is stealth – you don’t really notice a difference in your take home income.
You might ask – how is this a change if nothing is actually changing? That is a fair question!
As you can see in the image above – the Personal Allowance is now frozen till 2028. What this means – the amount of income people won’t be taxed on will stay the same until 2028.
Previously this was due to increase as of 2026. This is done in order to adjust the tax free amount in line with average salary growth.
As minimum salary increases – so should the tax free allowance in order to give those on the lowest income a chance to maintain their standard of living. By freezing this for extra 2 years – those on the minimum salary will actually be earning less in terms of their buying power.
This is a complicated topic and seems like a bad decision as this will impact literally every single person currently paying tax. As inflation will keep devaluing your money – the real take home income won’t grow enough to offset this.
summary
The proposed changes to the higher earners seem to be done in a way so that the super rich are not overly upset. This probably isn’t the solution the government should have looked at in order to cover the budget deficit we currently have.
Taxes for the super wealthy could have been more radical in my personal view. This then could have created an opportunity for the government to actually not freeze the personal tax allowance for additional 2 years.
By doing that – the government would actually do the ethical thing and help those who need it the most.
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