Income tax

Income tax rates

The government had previously announced that there would be a cut in the basic rate of income tax, from 20% to 19%, from April 2024. This is now being accelerated so that it takes effect from April 2023.

Comment

The government states that this reduction is worth over £5 billion for workers, savers and pensioners. Also, that 31 million taxpayers will benefit in 2023/24, with an average gain of £170.

These changes will generally apply to taxpayers in England, Wales and Northern Ireland. It remains to be seen what the Scottish government will do in relation to the setting of rates on non-savings income.

At the Mini Budget on 23 September the government announced a plan to abolish the 45% additional rate of income tax from April 2023. However, Chancellor Kwarteng stated on 3 October that the government would not proceed with the abolition of the 45p tax rate.

There are a number of tax consequences which stem from these changes. One of them is the amount of tax relief given at source on pension contributions and Gift Aid donations. This is currently given at the basic rate of 20%. The government has stated that there will be a four-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20% until April 2027. This will support almost 70,000 charities and is worth over £300 million. However, there was little comment on pension contributions other than that there will also be a one-year transitional period for Relief at Source pension schemes to permit them to continue to claim tax relief at 20%.

Dividends

From April 2023:

  • the dividend ordinary rate of 8.75% will reduce to 7.5%
  • the dividend upper rate of 33.75% will reduce to 32.5%

The dividend additional rate was due to be abolished along with the 45p income tax rate. This is now unlikely to go ahead after the income tax measure was reversed.

As corporation tax due on directors' overdrawn loan accounts is paid at the dividend upper rate, it will also reduce to a 32.5% charge for loans made on or after 6 April 2023.

These changes will apply in Scotland as the rules on dividends apply to the whole of the UK.