Craig Simpson, Tax Partner at Bates Weston considers whether Income Tax will be cut in tomorrow’s Autumn Statement.

The mainstream media is predicting cuts to income tax tomorrow as the Prime Minister Rishi Sunak pledges to “cut tax and reward hard work”.

The overall income tax and national insurance revenues in the UK in 2023 were £425bn which equates to 54% of the overall tax revenues in the UK. In the last three years the revenues from income tax and national insurance have increased by £90bn from pre-pandemic levels of £335m. 34.6m people pay income tax out of the population of 67m.

After such a huge increase in tax revenues it is perhaps not surprising that the government can now consider tax cutting.

The income tax system is progressive (i.e., the more you earn the more you pay) and the increases in revenues have in large part been driven by the fiscal drag of middle earners moving from basic rate taxation into higher rates as their wages have increased.

So how might the Chancellor Jeremy Hunt change the Income Tax system?

Increase the personal allowance – He could increase the personal tax free allowance from the current rate of £12,570. A move that benefits 95% of the working population this is the most likely move.

Increase the higher rate income tax threshold. Currently an individual has to earn £50,270 before higher rate tax is paid. Targeting middle earners he could increase this threshold to £60,000 taking more people out of higher rate tax.

Reduce the headline rate of income tax – The combined income tax and national insurance rates are currently 32%:42% and 47% for earned income. Leaving the tax thresholds as they are but reducing the main rates is less likely in my view.

Remove the personal allowance tapering above £100,000 of income – At present the personal allowance tapers away to nil as income increases above £100,000 per annum. This creates a particularly penal rate of personal tax of 62%. Politically this would reward high earners but the current system is unnecessarily complex and removing this rule would likely see a greater amount of tax collected as taxpayers do less to avoid the 62%.

Introduce flat tax – make life simple for everyone and have one rate of the personal tax for all income. I am joking with this one! Not likely

It will be an interesting Autumn Statement.

This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.

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