Personal Allowance
As previously announced, the tax free personal allowance has been frozen at the current level of £12,570 and this will remain in place until the end of 2025/26.
For taxpayers who have income over £100,000 in a tax year, the personal allowance will continue to be withdrawn. £1 of the personal allowance is lost for every £2 of income over the £100,000 threshold, creating the infamous “60% tax band”. In 2022/23 people with income over £125,140 will therefore not receive any personal allowance.
Income Tax Rates
Income tax rates and bands have been largely untouched apart from the slight tweak to dividend tax below.
The basic rate of income tax remains at 20% and this rate applies to the next £37,700 of income after the personal allowance.
The higher rate of tax remains at 40% and this rate applies to income in excess of £50,270.
The additional rate of tax which applies to income over £150,000, remains at 45%.
As announced last month, dividend tax rates within the three bands above will all increase by 1.25% from April 2022 in order to ensure that those operating through limited companies do not avoid the equivalent 1.25% increase to national insurance as part of the health and social care reform. The dividend tax rates will therefore increase to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for higher rate taxpayers from April 2022.
National Insurance Contributions
As announced last month as part of the health and social care reform, a 1.25% NIC increase across the board will be introduced from April 2022.
This will result in the main rate of employee’s class 1 NIC being increased from 12% to 13.25%, with the rate on earnings above the upper limit being increased from 2% to 3.25%. Employer’s class 1 NIC will also be increased by 1.25% from 13.8% to 15.05%.
A corresponding increase to the rate of class 4 NIC for the self employed will also be introduced. This will result in the main rate of class 4 NIC being increased from 9% to 10.25%, with the rate on earnings above the upper limit being increased from 2% to 3.25%.
These increases (along with the above corresponding dividend tax increase) will remain in place until April 2023, when they will be replaced by a separate 1.25% levy.
Scottish Tax Rates
Taxpayers north of the border in Scotland are subject to Scottish tax rates on their earned income which are slightly different to those in the rest of the UK.
Scotland have not yet announced their tax rates for 2022/23, they have set a date for their budget of 9 December 2021 so we will know more after this date.
The main 20%/40%/45% bands have in recent years been increased across the board by 1% to 21%/41%/46% accordingly in Scotland. There have also small 19% and 20% bands in Scotland before the 21% band kicks in.
The main difference previously however, is the level at which the higher rate tax begins. In Scotland this starts to be levied on income over £43,662 from April 2021 whereas those in the rest of the UK were not liable to pay higher rate tax until they hit £50,270.
Basis Period Reform
Not announced as part of Rishi’s speech, but released as part of the budget documents, was confirmation that the recently consulted “basis period reform” will go ahead from April 2024.
Unincorporated businesses with an accounts year end that does not tie in with the tax year end are generally taxed on the profits earned in the accounting period that ends in the particular tax year. For example a business with a 30 June accounts year end, the profits for the year to 30 June 2021 are taxed in the 2021/22 tax year.
From April 2024 onwards, all unincorporated businesses will be taxed on their profits earned on a tax year basis, regardless of their accounting period. This change has been introduced to ensure fairness and in theory to simplify matters ahead of the planned introduction of Making Tax Digital (MTD) for income tax from April 2024.
In order to implement this change, we will have a year of transition in 2023/24 where all basis periods are aligned to the end of the tax year. For example the business above with a 30 June accounts year end, will be taxed on the 12 months profit to 30 June 2023 and then also the 9 months profit to 5 April 2024 so 21 months profit being taxed in one tax year. There will be relief for “overlap profits” that are essentially profits that were taxed twice when the business commenced, but in many cases these historic overlap profits are likely to be much smaller than the current level of additional profits being taxed. 2023/24 is therefore likely to be a bumper year in terms of profits being taxed for some businesses.
In order to mitigate this spike in taxable profits, there will be an option to spread this “adjustment” over 5 years if you prefer. This may or may not be an attractive option depending on the figures so planning around these changes will be crucial.
Please click here to go back to other Autumn Budget 2021 articles.
