Who pays 45p income tax rate? Income tax bands explained as Liz Truss and Kwasi Kwarteng U-turn on tax cut

The in Birmingham has gotten off to a poor start for Liz Truss and her .

The government has been on one of its headline – the for the UK’s highest earners.

It was a U-turn that came only 24 hours after the with BBC presenter Laura Kuenssberg.

who pays 45p income tax rate? income tax bands explained as liz truss and kwasi kwarteng u-turn on tax cut

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Major questions continue to circle around other aspects of Mr Kwarteng’s mini budget. It was full of tax cuts necessitating , but was not (OBR) – an omission that spooked the markets and .

So, with just hours to go until to Tory Party Conference, what is the top rate of income tax? Here’s what you need to know.

There are major questions about Chancellor Kwasi Kwarteng’s political future given his income tax rate cut U-turn (image: AFP/Getty Images)

There are major questions about Chancellor Kwasi Kwarteng’s political future given his income tax rate cut U-turn (image: AFP/Getty Images)

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What is income tax?

Income tax is a tax every working person in the UK earning money above a certain limit over 12 months pays on their salary. But what you pay depends on how much you earn.

For most workers, anything they earn over a personal allowance of £12,570 is taxable under income tax. In England, Wales and Northern Ireland, income tax is split into these bands:

  • Up to £12,570 = 0%
  • Between £12,571 to £50,270 = 20%
  • From £50,271 to £150,000 = 40%
  • Over £150,000 – 45%

The 20% rate is due to be lowered to 19% from April 2023. This 1p cut to the basic rate will mean 31 million people will be better off by an average of £170 per year, according to the government.

The bands are different in Scotland, which has a starter rate of 19% (for incomes between £12,571 and £14,732) and an intermediate rate of 21% (for those earning £25,689 to £43,662). Its higher rate (above £43,663) is 41% and its top rate (£150,000+) is 46%.

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Scotland’s leader Nicola Sturgeon has rebuffed calls to implement the tax cut north of the border.

First Minister Nicola Sturgeon.

First Minister Nicola Sturgeon.

In all the UK nations, those who earn above £125,140 do not get a personal allowance. It means all of their income is exposed to the taxman.

This is why the top rate of income tax is known as the 45p rate. Everyone in this top band pays 45p to the Treasury for every £1 they earn over £150,000.

According to the OBR, the tax was estimated to have generated £213.2 billion in the 2021/22 financial year, which is almost a quarter (24.7%) of the Treasury’s income from taxes.

Who pays the 45p income tax rate?

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The top rate of income tax is paid by around 600,000 people in England, Wales and Northern Ireland – just 1.2% of the working population.

has shown 36.1% of England’s highest earners live in London, while a further 24.5% are based in the South East.

London is where many of the UK’s biggest businesses are headquartered and is also one of the world’s largest financial centres.

Many of the UK’s wealthiest individuals work in the City of London (image: Getty Images)

Many of the UK’s wealthiest individuals work in the City of London (image: Getty Images)

The North East of England boasts just 1.4% of the UK’s most salaried individuals, while the Yorkshire and Humber region has only 4% of the total. It means the cut to the top rate of income tax would have disproportionately benefited the south of England over the north.

In Scotland, just 0.7% of the population (some 31,000 people) earn more than £150,000. In Wales, 9,000 individuals (0.2%) earn this amount and in Northern Ireland, the figure is 6,000 (0.3%).

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Why did Kwasi Kwarteng U-turn on 45p rate?

When announcing he would abolish the top rate of income tax on 23 September, the Chancellor Kwasi Kwarteng said it would encourage economic growth as it would attract higher earners to the UK. This argument exemplified the both he and Liz Truss are strong advocates of.

Reversing his 45p income tax cut is a humiliating climbdown for a Chancellor who espouses trickle down economics (image: PA)

Reversing his 45p income tax cut is a humiliating climbdown for a Chancellor who espouses trickle down economics (image: PA)

“From April 2023 we will have a single higher rate of income tax of 40%. This will simplify the tax system and make Britain more competitive,” Mr Kwarteng said at the time.

“It will reward enterprise and work. It will incentivise growth. It will benefit the whole economy and the whole country. And, Mr Speaker, after all, this only returns us to the same top rate we had for 20 years – including the entire time the Opposition was last in power – bar one month.”

Part of the justification Mr Kwarteng gave was that the UK’s 45p income tax rate was the highest percentage tax rate in an income tax top band among the G7 group of nations.

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However, Mr Kwarteng was (3 October) because he said the policy was becoming a “huge distraction” from the rest of the mini budget. The announcement was a humiliating climbdown for the Chancellor and the Prime Minister.

The cut to the top rate of income tax sparked outrage given it stood to disproportionately benefit the UK’s wealthiest people. In the same mini budget, Kwasi Kwarteng also .

Meanwhile, the government has in line with inflation. Inflation currently , largely as a result of the .

Not only did big-name Conservative MPs like Michael Gove and Grant Shapps suggest they would not vote for the measure in Parliament, but the urged a U-turn, singling the policy out for criticism as it said it would .

Scrapping the top rate of income tax was announced alongside a clampdown on benefits claimants (image: Adobe)

Scrapping the top rate of income tax was announced alongside a clampdown on benefits claimants (image: Adobe)

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Responding to the U-turn, Katy Chakrabortty – head of policy and advocacy at Oxfam – said: “We are pleased that the Government has stopped, listened and understood that cutting taxes for the richest during a cost of living crisis is not the way to go.

“It needs to keep listening and provide urgent support to people facing poverty in the UK and those facing famine in other parts of the world. It is essential that ministers don’t seek to balance the books on the backs of people struggling to pay the bills and feed their families – public services, welfare and aid are all needed now more than ever.“

While it was the politics of the announcement that was doing the most damage to the government, it was also one of the many tax cuts that spooked the markets in the immediate aftermath of the mini budget – something which

that the swathe of tax cuts Kwasi Kwarteng announced with an independent OBR assessment – including the and the – were “economically dangerous”.

Kwasi Kwarteng was forced to U-turn on the abolition of the top rate of income tax (image: Getty Images)

Kwasi Kwarteng was forced to U-turn on the abolition of the top rate of income tax (image: Getty Images)

The scrapping of the top rate stood to reduce tax receipts generated for the public purse by around £2 billion. While this figure only accounted for a small proportion of the £45 billion in tax cuts, it nonetheless added to the requirement for much higher .

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In response to the Chancellor’s U-turn, the pound rose by more than a cent against the dollar to $1.1263. However, financial brokerage XTB warned it would not be enough on its own to spark a turnaround in the value of the UK’s currency.

“There’s every likelihood this [U-turn] will buy the UK government time politically but not necessarily from investors. The 45p tax cut has taken around £2billion off extra borrowing. That’s it,”said XTB director Joshua Raymond.

“The UK government is facing extra borrowing of closer to £150bn and at higher interest rates than in the past decade. That’s the problem. Until investors get clarity in the scale of borrowing needed and costs, which means a detailed OBR forecast, the pound Sterling volatility will likely continue.”

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