Archived article
Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
The statement on 23 September from Chancellor Kwasi Kwarteng turned out to be anything but the ‘mini’ budget promised.
Badged by the government as the ‘Growth Plan 2022’, several key reforms were revealed this morning, some with an instant impact on taxpayers.
Changes to income tax, national insurance (NI) and dividend taxation will all impact households with income and investments, and NI changes will also have a knock-on effect on pension tax relief.
Meanwhile, there are a plethora of measures aimed at boosting business and delivering the growth that the Truss-Kwarteng administration has promised.
1. Income Tax
The big surprise announcement was the scrapping of the additional rate of income tax, meaning the highest earners in the UK will now pay the 40% tax rate on earnings, rather than the current 45%.
Mr Kwarteng also announced plans to bring forward the planned cut to basic rate of income tax, meaning the current 20% rate will be cut to 19% from next April.
It means anyone earning over the current personal allowance of £12,570 stands to benefit, with the Government estimating the average worker will save £170 a year.
Although it is worth pointing out that previously announced plans to freeze income tax bands is still pushing many workers into higher tax brackets. So, although today’s announcements will be likely welcome news for income tax payers, it is worth taking a step back to look at the big picture.
2. Pension Tax relief
Because pension tax relief is paid at your marginal rate of income tax, lowering the tax people pay also reduces the amount of tax relief they are entitled to.
For basic-rate taxpayers, lowering income tax from 20% to 19% will cut the effective pension saving ‘bonus’ provided by tax relief from 25% to around 23%. For additional-rate taxpayers, reducing the income tax rate from 45% to 40% will see their savings bonus drop from around 82% to 66%
Pensions still remain an extremely tax-efficient long-term savings vehicle. Although for some basic-rate taxpayers saving into a pension, the reduction in tax relief to 19% may mean that Lifetime ISAs, which continue to offer a savings bonus equivalent to 20% tax relief, will become comparatively more attractive. This will depend on each person’s circumstances, and pensions may still be favourable, for example where someone is receiving an emp loyer contribution in addition to tax relief.
Pension tax relief: current system
- Basic-rate taxpayer – pays in £80, gets £100 in their pension (20% tax relief, 25% bonus)
- Higher-rate taxpayer – pays in £80, gets £100 in their pension, claims back £20 (40% relief, 66% bonus)
- Additional-rate taxpayer – pays in £80, gets £100 in their pension, claims back £25 (45% relief, 82% bonus)
Pension tax relief – new system
- Basic-rate taxpayer – pays in £81, gets £100 in their pension (19% tax relief, 23% bonus)
- Higher-rate taxpayer – pays in £81, gets £100 in their pension, claims back £21 (40% relief, 66% bonus)
- Additional-rate taxpayer – pays in £81, gets £100 in their pension, claims back £21 (40% relief, 66% bonus)
3. Stamp Duty
Reforms to Stamp Duty will also grab the headlines. The Chancellor announced that stamp duty will now not apply up to £250,000, double the current level.
The biggest gains are for first time buyers, who will now benefit from a nil-rate on stamp duty up to a threshold of £425,000. In addition, First Time Buyers Relief can now be applied on purchases up to £625,000, up from £500,000.
Standard Residential SDLT rates from 23 September 2022
| Property Value | Standard Residential Rates |
|---|---|
| £0 – £250,000 | 0% |
| £250,000 - £925,000 | 5% |
| £925,000 - £1,500,000 | 10% |
| £1,500,000+ | 12% |
4. Dividend Tax
The Chancellor’s plans to abolish the highest rate of dividend tax are the biggest shake-up to the system in years and will save the highest earning investors and company directors thousands of pounds each year.
The move comes on top of previously announced plans to abolish the 1.25% increase that Rishi Sunak announced last year.
The two measures together dramatically reduce the tax payable on dividends.
Those earning over £150,000 a year will see their dividend tax rate cut from 39.35% this year, to 32.5% next year.
Someone receiving £50,000 of dividends a year will save £3,288 next year in comparison to this year, while those taking £10,000 of dividends a year will be better off to the tune of £548.
Historic dividend tax rates |
||||
|---|---|---|---|---|
| Date from | Basic rate | Higher rate | Additional rate | Dividend allowance |
| 06-Apr-16 | 0.0% | 25.0% | 30.6% | £0 |
| 06-Apr-17 | 7.5% | 32.5% | 38.1% | £5,000 |
| 06-Apr-18 | 7.5% | 32.5% | 38.1% | £5,000 |
| 06-Apr-19 | 7.5% | 32.5% | 38.1% | £2,000 |
| 06-Apr-20 | 7.5% | 32.5% | 38.1% | £2,000 |
| 06-Apr-21 | 7.5% | 32.5% | 38.1% | £2,000 |
| 06-Apr-22 | 8.8% | 33.8% | 39.4% | £2,000 |
| 06-Apr-23 | 7.50% | 32.50% | NA | £2,000 |
Source: AJ Bell. April 2023 figures based on Government plans
5. Savings relief
The changes to income tax rates have also handed more taxpayers a £500 tax break on their savings.
Currently those earning over £150,000 a year are not eligible for any tax-free allowance on their savings income - the Personal Savings Allowance. However, the move to abolish the additional rate band means that those individuals will now be entitled to get the first £500 of their savings income tax free. This will save additional rate taxpayers up to £225 a year.
6. Business and the economy
Housebuilders and retailers were among the main industry beneficiaries of Kwasi Kwarteng’s mini-budget, due to the aforementioned stamp duty changes.
Shares in Taylor Wimpey, Persimmon and Berkeley jumped on confirmation of change to stamp duty and that the Government plans to sell more surplus land for housing.
However, there will be disappointment from both the retail and hospitality sector that the VAT cut announced was only for tourists. Many businesses had been hoping for a broader cut to VAT.
There were several initiatives announced with the aim of stimulation growth and supporting businesses. There include the scrapping of a planned corporation tax increase and promises to streamline the planning process for big infrastructure projects and the creation of new ‘enterprise zones’ with a whole host of tax breaks and bonuses available to companies that set up in these designated areas.
Time will tell if that ‘Growth Plan’ delivers the economic boost promised by the Chancellor.
These articles are for information purposes only and are not a personal recommendation or advice.
How you're taxed will depend on your circumstances, and tax rules can change.
Written by:
Laura Suter
Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.
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