- Government scraps additional rate of income tax
- Stamp duty thresholds rise for property purchases
The UK's highest earners will see their tax burden reduced thanks to the government’s decision to scrap the additional rate of income tax and the dividend additional rate.
Starting from April 2023, annual income above £150,000 will be taxed at the 40 per cent higher income tax rate, the same level that currently applies between £50,271 and £150,000, rather than the current level of 45 per cent.
Additional rate earners will also benefit from the £500 personal savings allowance and see their dividend rate reduced to 32.5 per cent from the current 39.35 per cent, putting them on the same level as those in the higher-rate tax band.
It follows yesterday’s announcement of the reversal of the 1.25 percentage point increase to income tax on dividends. The increase was introduced in April 2022 and will be cancelled from the next tax year.
Meanwhile, a 1 percentage point decrease to the basic rate initially planned for April 2024, from 20 per cent to 19 per cent, will be brought forward to April 2023, affecting all income tax payers.
The changes are part of the government’s growth push, outlined by chancellor Kwasi Kwarteng in today’s mini-Budget. The government has cited a wish to attract talent to the UK and simplify the tax system among its reasons for cutting income tax.
Will Stevens, head of financial planning at Killik & Co, called the removal of the additional rate “one of the most significant income tax changes in recent times” and said the tax saving for highest earners will be “substantial”.
But he fears that overall the changes might be inflationary and that future generations "will be left to pick up the bill for tax cuts made now”.
Stamp duty thresholds rise
The government has also raised the thresholds at which stamp duty will be paid on property purchases, effective immediately.
Homebuyers will now only start paying stamp duty when purchasing a property worth more than £250,000, up from the previous £125,000.
First-time buyers will pay stamp duty from the threshold of £425,000, up from £300,000. This will apply for properties costing less than £625,000, rather than the previous £500,000 maximum on which relief can be claimed.
The government expects the measure to “increase additional residential investment, boost spending on household goods and support the hundreds of thousands of jobs in the property industry”.
With the new rates, a standard home mover purchasing a £400,000 property would save £2,500, while a first-time buyer would save £5,000.
A tax much criticised for the way it targets transactions and potentially distorts the property market, stamp duty was temporarily reduced by former chancellor Rishi Sunak in July 2020. The stamp duty holiday lasted until September 2021 but was accused of further fuelling property price rises.
House prices in the UK increased by 15.5 per cent in the year to July 2022, according to the Office of National Statistics. But mortgage approval rates were down by 14 per cent over the same period of time according to Bank of England data, marking the twelfth consecutive year-on-year decline.
Ahead of the budget announcement, Richard Donnell, director of research at Zoopla, called stamp duty “a tax on home buying in southern England” and argued that stamp duty cuts would need to target properties valued at £500,000 and above to have an impact on activity levels.
