Mini-Budget: Kwarteng announces cut to basic rate income tax
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Today, Chancellor Kwasi Kwarteng unveiled a new and radical plan for income tax. The Government has said it will cut the basic rate of income tax to 19 percent in April 2023 – a year earlier than previously announced.
However, Mr Kwarteng is also taking a stark move to totally abolish the higher rate of 45 percent of income tax, usually applied to incomes over £150,000.
This will come into effect from April 6, 2023, with a substantial impact for higher rate taxpayers.
Experts have suggested the income tax changes present new opportunities for pensioners and pension savers.
Helen Morrissey, senior pensions analyst at Hargreaves Lansdown, said: “Both annuities and drawdown are subject to income tax, so this will be a shot in the arm for pensioners.
“The one percent cut may only sound minor, but it can add up to serious savings with someone on a £25,000 income paying over £125 less per year.
“Basic rate taxpayers drawing an income from their pension will be relieved to be handing less over to the taxman so they can spend more making ends meet.”
However, there is still some time to wait before these changes are introduced.
Ms Morrissey highlighted this could present problems for state pensioners waiting for their sum to be uprated with inflation – particularly those totally reliant on the sum.
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Pension savers who are basic rate taxpayers, however, may have a more challenging time.
This is because their tax relief will be less generous going forward, with Britons getting only £19 for every £8 they contribute, rather than £20.
Relief for former additional rate taxpayers is also set to fall, but all contributions are completely tax free.
Ms Morrissey added: “The fact workplace pensions receive tax relief, and a contribution from your employer still make them incredibly powerful places to save for the future.”
Other experts have suggested now presents a limited time chance for those who are saving into a pension.
Andrew Tully, technical director at Canada Life, said: “There is a pension planning opportunity for those who can afford to make pension contributions in the current tax year.
“Additional rate taxpayers will get 45 percent relief, whereas next year contributions will only receive 40 percent relief.
“Similarly, basic rate taxpayers can obtain 20 percent relief on contributions this year, which will fall to 19 percent next year.”
Mr Kwarteng has vowed to usher in a “new era” with his mini-Budget changes, however, some are worried about what the alterations will mean for those struggling to build wealth for retirement.
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James Jones-Tinsley, Self-Invested Pensions Technical Specialist at Barnett Waddingham says: “For consumers, the cut in income tax to 19 percent is a double-edged sword.
“It is an immediate gain in income with a long-term sting in the tail from a smaller pension. The one percent loss may sound inconsequential, but it compounds over a working lifetime – as Einstein said, it’s ‘the eighth wonder of the world’, and those who don’t understand it, pay the price.
“Individuals now need to increase their personal contributions just to stand still; this might not be a tempting prospect with climbing interest rates and rising inflation.
“Nothing in the Chancellor’s speech spoke to the UK’s looming retirement crisis – there’s only so long the Government can kick this can down the road.”
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