Potential Income Tax Hike in the Budget: What it Could Mean for Millions of Workers

Strategic Insights -

Reports suggest that Chancellor Rachel Reeves is considering a 1p increase in the basic rate of Income Tax, which could raise an estimated £8 billion for the Treasury. This potential tax hike has sparked debate and speculation, with Labour's leader Sir Keir Starmer declining to rule out tax increases. The party's manifesto commitment to not increase taxes on working people, including Income Tax and National Insurance, remains unclear.

Key Takeaways:

  • Income Tax works by having a personal allowance, currently set at £12,570, which is a set amount earned before paying Income Tax. Tax rates increase at £50,270 (40% income tax) and £125,140 (45% income tax) earnings thresholds.
  • Reports suggest a 1p increase in the basic rate of Income Tax could raise an estimated £8 billion for the Treasury, but nothing has been confirmed.
  • Analysis by AJ Bell shows someone earning £35,000 a year could see their annual tax bill rise from £4,486 to £4,710, while someone earning £20,000 a year could see their bill jump from £1,486 to £1,560.
  • The marriage tax allowance might be beneficial for couples with different earnings levels, allowing the non-taxpayer to give £1,260 of their personal allowance to their spouse to cut their tax bill.
  • Salary sacrifice schemes, allowing employees to exchange a portion of their pre-tax salary for non-cash benefits, might reduce taxable income and, in some cases, increase take-home pay.

Statistics:

  • The basic rate of Income Tax is currently at £12,570, with tax rates increasing at £50,270 and £125,140 earnings thresholds.
  • A 1p increase in the basic rate of Income Tax could raise an estimated £8 billion for the Treasury.
  • Internal analysis by AJ Bell estimates the impact of a 1p income tax increase on annual tax bills for different income levels:

+ £35,000 a year: £4,486 to £4,710 (an increase of £224).

+ £20,000 a year: £1,486 to £1,560 (an increase of £74).

+ £50,000 a year: £7,486 to £7,860 (an increase of £374).

Sources:

  • "Labour refuses to rule out ' Lizzy Davies, The Mirror, October 12, 2023.
  • "How to reduce your tax bill", This is Money, October 15, 2023.