Any changes to income tax affect a huge proportion of the British population. Of the 31m who pay income tax on their earnings, 25.6m are within the basic rate band. Chancellor Phillip Hammond announced the new income tax brackets, personal allowance amount and a change to the higher rate tax bands that will come into effect on 6th April 2019. How will these changes affect you?
From what he said during the Budget speech, it would seem that most people will pay less income tax and it includes both employed tax payers under PAYE and the self employed. Digging a little deeper into the document itself shows that the interplay between the different elements isn’t quite as positive for everyone as Mr Hammond portrayed.
Personal Allowance: Budget changes
The tax free personal allowance is the amount you are allowed to earn before you pay any income tax. It is £11,850 for the 2018-19 tax year. In April 2019 this will go up to £12,500. This is quite a jump and was actually the government’s target for the following year. So, if you’re in the basic rate tax bracket, that’s £650 you don’t have to pay tax on. An annual saving of £130.
Under the PAYE system if you earn more than £100,000, for every £2 you earn over £100,000 your personal allowance amount goes down by £1. By the time you hit £123,700, your personal allowance is cancelled out and you pay tax on all of your income.
Does this mean that my tax code will change?
Yes, tax codes can change every tax year to reflect the personal allowance and other relevant announcements in the Budget. It is crucial to check that you have the correct tax code because it determines how much tax you are paying. If it is wrong, you could be paying too much tax and need to submit an income tax refund claim. Or, worse case scenario, you could be paying too little income tax and owe HMRC the difference.
The new codes are released sometime between January and March, so everyone knows what to expect when the new tax year starts on April 6th.
Income tax bands: Budget changes
In 2019-20, the new income tax bands are:
Basic rate 20%: Between £12,500 (new Personal Allowance amount) and £50,000
Higher rate 40%: Between £50,000 and £150,000
Additional rate 45%: over £150,000
As you know, nothing is totally straightforward about tax. Your personal income tax bill incorporates several factors, including:
National Insurance Contributions (NICs), tax free personal allowance amount, tax band definitions and work expenses allowances. This is not an exhaustive list. So, this is a summary of the new income tax bands and how much you could be saving once the changes come into force. You need to work out your own figure based on your specific circumstances.
Income up to £8,424: no change
Income £8,424.01 – £6,632: maximum saving £25.00
Income £8,632.09 – £46,384: maximum saving £155 (PA £130 + NICs £25)
Income £46,384.01 – £50,024: maximum saving depends on how much you earn. Rule of thumb; if you earn more, you save more.
Income £50,024.01 – £100,000: maximum saving £566 (PA & HR tax band changes £860 – NICs increase £294)
Income £100,000.01 – £123,700: Savings vary, depending on income (- NICs £294 and – PA amount decrease with every £2 extra you earn
Income £123,700: Saving £426 (HR tax band changes £730 – NICs £294)
Higher rate tax band changes
With the base rate raised from £46,350 to £50,000, we can earn an extra £3,650 before paying the 40% income tax rate. That’s a 20% saving of £730.
How do changes in National Insurance affect things?
As you can see from some of the calculation above, the Chancellor’s changes to National Insurance brackets do affect the total savings for those earning between £46,834 and £50,000.
If you earn up to £8,424, you won’t pay any NICs.
If you earn between £8,632 and £50,000, you will pay 12% NICs.
If you earn over £50,000, you pay 2% NICs.
Those that will feel the change are those earning between £46,834 and £50,000. They will effectively be paying an extra 10%, that’s £294 more per year. The current NICs arrangements have earners of up to £46,834 paying 12% and anything over paid at 2%.
Do these changes apply to everybody?
These Budget changes to income tax apply to all taxpayers in England, Northern Ireland and Wales. The Scottish Government will lay out its income tax changes in their Budget in December.
If you have any questions about how the Budget income tax changes will affect you it’s best to find out the answers sooner rather than later. That way nothing is a shock when the new tax year begins in April 2019.
