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Income tax: How could thresholds change and what might I pay?

Woman calculating her taxesImage source, Getty Images

The government is expected to announce changes to income tax rules, which could mean millions of people pay more.

It is the single biggest source of funding for the government.

What income do you pay tax on?

You pay income tax to the government on earnings from employment and profits from self-employment.

You do not pay income tax on earnings up to £12,570 – this is known as the tax-free personal allowance.

Income tax is also due on some benefits and pensions, the money you get from renting out property, and returns from savings and investments above certain allowances.

These rules apply in England, Wales and Northern Ireland. Scotland has different rules to the rest of the UK.

What changes are expected?

But the government can raise more money by freezing personal allowances and tax thresholds – the levels of earnings above which you start paying tax, or where you pay a higher rate.

In the past, thresholds have increased in line with inflation. Otherwise, the amount you can buy with your money – after you have paid taxes – falls.

For example, if you receive a 5% pay rise more of your income might fall into a higher tax band if these aren’t increased by the same amount. This means you pay more tax. This is sometimes called fiscal drag.

When Rishi Sunak was chancellor in March 2021, he announced that the personal allowance and the higher rate threshold would be frozen until 2025-26. The Institute for Fiscal Studies think tanks says inflation means the freeze could now be worth £30bn.

The BBC understands that the government will announce some tax thresholds will remain frozen for longer.

The threshold when the highest earners start paying the top rate of tax is also expected to fall to £125,000 from £150,000.

What is the basic rate of income tax?

At the moment, you pay the basic rate of income tax on earnings between £12,571 and £50,270 a year.

The basic rate is 20%, so a fifth of the money you earn between those amounts goes to the government.

What is the higher rate of income tax?

The higher rate of income tax is currently 40%, and is paid on earnings between £50,271 and £150,000 a year.

But once you earn over £100,000 a year, you start losing your tax-free personal allowance.

You lose £1 of your personal allowance for every £2 that your income goes above £100,000, which means if you earn more than £125,140 a year, you no longer get any personal allowance.

What is the additional rate of income tax?

Under the current rules, the additional rate of income tax is 45%, and is paid on earnings above £150,000 a year.

The government says about 660,000 people pay the additional rate of income tax.

What is National Insurance?

For employees, National Insurance is in many ways similar to income tax – it is also a tax on the money you earn.

It is the second biggest source of money for the government.

It works on some of the same thresholds as income tax.

You do not pay it on the first £12,571 you earn a year. It is then charged at 12% on earnings up to £50,271, and it is 2% on any money made above that.

This may vary if you’re earning more in some months and less in others.

It is not paid by people over the state pension age even if they are still working.

Employers also have to pay National Insurance.

How is tax different in Scotland?

  • No tax paid on £12,570 personal allowance
  • £12,571 to £14,732 starter rate of 19%
  • £14,733 to £25,688 Scottish basic rate of 20%
  • £25,689 to £43,662 intermediate rate of 21%
  • £43,663 to £150,000 higher rate of 41%
  • Above £150,000 top rate of 46%
  • Personal allowance reduced by £1 for every £2 earned above £100,000.

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