"While this is a welcome boost to take-home pay, for many it will fail to compensate for frozen income tax thresholds."
In his 'Growth Plan Statement', Kwarteng confirmed that the basic rate of income tax will be cut to 19p next year.
He said: "I can announce today that we will cut the basic rate of income tax to 19p in April 2023 – one year early. That means a tax cut for over 31m people in just a few months’ time. That means we will have one of the most competitive and pro-growth income tax systems in the world."
In addition, the top rate of income tax – the 45% rate for earnings over £150,000 – is being abolished altogether.
Kwarteng said that reducing tax is "central to solving the riddle of growth".
The chancellor has also cancelled his predecessor Rishi Sunak’s increase in corporation tax from 19 to 25%.
Kwarteng added that the move will mean the UK has the "lowest rate of corporation tax in the G20".
Yesterday, Kwarteng announced that the planned 1.25 percentage point increase in national insurance will be removed on 6th November.
Will Stevens, head of financial planning at Killik & Co, said: “The removal of the additional rate represents one of the most significant income tax changes in recent times, which will deliver a substantial tax saving to the UK’s highest earners. They will also benefit from the abolition of the additional rate of dividend tax.
“The basic rate of tax will fall from 20p to 19p. The cut will benefit all taxpayers, aiding with the cost-of-living crisis faced by many and should stimulate the economy further.
“The government is clearly aiming to improve the competitiveness of the UK compared to rival economies, encourage entrepreneurship, and increase discretionary spending.
“However, the longer-term effect of this could apply further pressure to already high levels of inflation and there is fear that future generations will be left to pick up the bill for tax cuts made now.”
Steven Cameron, pensions director at Aegon, commented: “The government’s decision to cut the basic rate of income tax from 20% to 19% from April 2023, a year earlier than planned, will mean millions can keep more of what they earn. However, income tax thresholds are currently frozen until 2026 and over time, wage increases mean people are paying tax on more of their income, and in some cases are being dragged into paying higher rate tax. This is a particular issue in the current climate as soaring inflation has accelerated wage increases.
“While this is a welcome boost to take-home pay, for many it will fail to compensate for frozen income tax thresholds. Unfreezing these would be a much more powerful lever to support lower and modest earning households. For anyone earning under £37,670, increasing the basic rate threshold by 10%, around the current rate of inflation, would offer a greater income tax saving than cutting the rate of income tax from 20% to 19%.
“Aegon analysis shows that a 10% increase in the current threshold for paying basic rate income tax would save people earning above £13,827 around £250 over a year in income tax. This is based on the basic rate of income tax of 20% in England.
“Different income tax rates apply in Scotland, so individuals will have to wait to see if the Scottish Government makes equivalent changes.”
Finn Houlihan, managing director at Arlo Group and ATC Tax, added: “The decision to abolish the 45% tax rate will have a huge, direct impact on households. The government is clearly trying to put more money in people’s pockets. In doing so, they know that the people who are likely to see the biggest change to their income in real terms are more likely to spend it than save it and this will, in turn, boost business growth.
"With significant rhetoric around making the UK a more favourable tax environment for all, this is clearly a good chance for advisers to discuss options and tax efficiency with clients. The measures taken by the government will cushion the impact of yesterday’s rate decision, and seeking professional advice will help people see the long term benefits of some of the solutions available that enable them to make the most informed financial decisions.”
