Senior solicitor Andrea Corr, in our Employment Law team, explains Income Tax.
What is Income Tax?
In general terms income tax is a tax imposed on individuals in respect of their earnings/taxable income.
What are earnings and taxable income?
Earnings tends to refer to salary or wages from employment as well as profits from self-employment. However, taxable income also includes (but is not limited to); income from pensions; income from rental property or trusts; dividends on shares; interest on savings and certain state benefits.
When was Income Tax introduced?
It was first introduced in Great Britain in 1798 to fund the Napoleonic Wars. In 1816 it was removed (following the Battle of Waterloo in 1815). It was then reintroduced in 1842 following the emergence of a free trade economy at the rate of 7d (pence) in the pound on incomes over £150 per year. It was initially meant to be temporary but has remained in force since then.
What is the money raised by Income Tax used for?
Nowadays the money is used to pay for funding public services, including the NHS, education. welfare, defence, roads, and rail.
Who pays Income Tax?
In general, anyone with taxable income over £12,570 per year (as of 2022/23).
Is Income tax compulsory?
Yes if you meet the criteria (and there are severe penalties for those who attempt to avoid doing so).
What is PAYE?
It refers to Pay As You Earn and it is a system operated by an employer to tax income at source before accounting for it to the tax authorities.
What is the “personal allowance”?
It generally refers to the first £12,570 of income (as of 2022/23) on which no tax is paid.
Does everyone receive the personal allowance?
No. if you earn over £100,000 per year (as of 2022/23) your personal allowance is reduced by £1 for every £2 over £100,000 that you earn. Ultimately if you earn over £125,140 you do not receive any personal allowance at all.
How is the amount of Income tax determined?
It is based on a series of tax thresholds which are set each year.
What are the current tax thresholds?
For 2022/23 in England and Wales they are as follows:-
|
Personal Allowance £0 - £12,570 per year |
£0 |
|
Basic Rate £12,571 - £50,270 per year |
20% |
|
Higher Rate £50,271 - £150,000 per year |
40% |
|
Additional Rate Over £150,000 per year |
45% |
What about Income Tax in Scotland?
The principles are broadly similar but the rates vary very slightly.
Are these tax rates in addition to National Insurance Contributions (NICs)?
Yes and many employees also pay auto-enrolment pension contributions as well as National Insurance Contributions.
Are tax thresholds increased each year? And if so, by how much?
It depends upon the Budget. Often thresholds are increased in line with inflation (or similar price indexes). However, In 2021 Rishi Sunak, as the then Chancellor, announced a four year freeze. This was due to run from the tax years 2022/23 to 2025/26.
What is “fiscal drag”?
It refers to the situation where tax thresholds are frozen, or are not increased in line with inflation (or the overall rise in earnings), or are reduced. As such more employees are drawn into higher bands of tax as wages rise. As an example, in 1990 only 1.7 million people were higher rate taxpayers. By 2019 this had reached 4.3 million and with the current freeze it is estimated that there will be six million higher rate taxpayers in 2022/23.
How will these thresholds change in 2023/24?
The Chancellor, Jeremy Hunt, has announced the following tax thresholds for England and Wales for 2023/24:-
|
Personal Allowance £0 - £12,570 per year |
£0 |
|
Basic Rate £12,571 - £50,270 per year |
20% |
|
Higher Rate £50,271 - £125,140 per year |
40% |
|
Additional Rate Over £125,140 per year |
45% |
What other changes did the Chancellor announce?
In the Autumn Statement this week the Chancellor announced (amongst other things) that the freeze on tax thresholds will be extended for a further 2 years to 2026/27 and 2027/28.
How many people will be affected by the freeze?
The Office of Budget Responsibility estimates that the 6 year freeze will create 3.2 million new basic rate taxpayers and will also draw a further 2.6 million taxpayers into the higher rate band.
How many people will be affected by the lowering of the Additional Rate threshold?
It is estimated that around 250,000 people will be drawn into the additional rate bracket, as a result of the lowering of the threshold. For someone earning £135,000 per year this would mean paying an extra £500 per year.
How are existing Additional Rate taxpayers affected by the reduction in the threshold?
Existing additional rate taxpayers will pay around an extra £1200 per year as a result of the lowering of the threshold.
Our specialist Employment Law team can advise you on your individual situation.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
