As discussions about a potential increase in Income Tax intensify ahead of the upcoming Budget announcement, the impact on numerous workers is being scrutinized.
Rachel Reeves declined to reaffirm the Labour manifesto’s pledge of not raising Income Tax, National Insurance, or VAT, emphasizing the need for collective contribution. Addressing the press at Downing Street weeks before the Budget on November 26, she stressed the importance of safeguarding families from inflation, preserving public services, and ensuring a stable economy for future generations.
Keir Starmer also refrained from ruling out the possibility of tax hikes when questioned by Conservative leader Kemi Badenoch during Prime Minister’s Questions. The lack of a direct response has raised speculation about potential adjustments in the tax regime.
Rumors suggest that the Chancellor is contemplating a 1p or 2p increase in the basic rate of Income Tax, with a 1p raise estimated to generate around £8 billion for the Treasury. However, these are mere speculations until officially confirmed during the Budget announcement.
There are also murmurs about a potential 2p reduction in National Insurance to offset the Income Tax hike, but these remain unconfirmed speculations at this point.
Each taxpayer has a personal allowance, currently set at £12,570 per tax year, before becoming liable for Income Tax. The basic rate of 20% applies to earnings above this threshold, with higher rates of 40% and 45% for higher income brackets.
Analysis by AJ Bell indicates that a 1p increase in Income Tax could result in an annual tax rise for an individual earning the UK average income of £35,000 from £4,486 to £4,710. For those earning £20,000, the annual tax bill could increase from £1,486 to £1,560 with a 1p rise, or to £1,635 with a 2p hike.
For individuals earning £50,270, the highest income threshold before the higher rate of Income Tax applies, a 1p increase could elevate the tax bill from £7,540 to £7,860, or to £8,294 with a 2p rise.
These projections are subject to change pending the official announcement and any potential adjustments to National Insurance or VAT.
Laura Suter, director of personal finance at AJ Bell, highlighted the potential financial burden on individuals amidst escalating costs, emphasizing the impact on disposable income, particularly during the festive season.
One strategy to mitigate tax liability is through employer-offered salary sacrifice schemes, where a portion of pre-tax salary is redirected towards non-cash benefits like pension contributions or childcare vouchers. This approach aims to reduce taxable income, potentially boosting take-home pay.
Similarly, the marriage tax allowance can be utilized by couples to optimize tax efficiency, with non-taxpaying spouses able to transfer a portion of their personal allowance to the higher-earning partner, reducing the overall tax liability.
As the Budget announcement approaches, uncertainties persist regarding the exact tax adjustments and their implications for taxpayers across various income brackets.
