The new Chancellor Jeremy Hunt has confirmed he will scrap plans to cut 1p from the basic rate of Income Tax.
The ex-Health Secretary this morning announced another U-turn on the disastrous Mini-Budget, in a bid to plug a giant hole in the public finances and restore market confidence.
The 1p cut to Income Tax was first announced by Rishi Sunak in March this year, with a view of it being put in place in 2024.
This measure was fast-tracked by Kwasi Kwarteng in his Mini-Budget last month, with the now ex-Chancellor pledging to bring this forward to 2023.
The announcement today by Jeremy Hunt means the 1p cut to Income Tax has been delayed "indefinitely".
But what is Income Tax, who pays it, and how much will a 1p cut save you?
Income Tax explained
You pay Income Tax on your earnings above a certain threshold.
It is charged on most types of income, including your salary and profits if you're a business owner.
Most people get a Personal Allowance of tax-free income - for the 2022/23 tax year, you can earn up to £12,570 before you start paying.
This means if you earn less than £12,570, you currently pay no Income Tax.
The majority of basic-rate taxpayers currently pay 20p in the pound on earnings between £12,571 and up to £50,270.
This was meant to drop to 19p in 2023 - but this change now won't go ahead.
Higher earners who have an income between £50,271 pay 40% income tax above this threshold, up to £150,000.
Any earnings above £150,000 are taxed at 45%.
This top tier rate of tax is now staying in place, after an original plan by Kwasi Kwarteng to scrap it was overturned.
Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance.
It’s smaller if your income is over £100,000.
You also have separate tax-free allowances for savings interest and dividends, if you own shares in a company.
Income Tax is separate to National Insurance.
How much money would the 1p cut have saved you?
Figures released by Interactive Investor show the 1p cut would have a bigger affect on higher earners.
It would have amounted to tax savings of £74 for someone earning £20,000.
This increases to £174 for a worker on £30,000 and £374 for someone with a £50,000 pay packet.
The figure is £674 and £874 for employees with an income of £80,000 and £100,000, respectively.
Here is how it breaks down:
- £20,000 salary: £74 saved
- £30,000 salary: £174 saved
- £50,000 salary: £374 saved
- £80,000 salary: £674 saved
- £100,000 salary: £874 saved
