Income Tax cuts Rishi Sunak is reportedly considering
Explore the basic rate and additional rate cuts in PolicyEngine
Yesterday, The Times reported that UK Chancellor Rishi Sunak is considering a number of tax cuts:
Cutting the Income Tax basic rate from 20% to 19% in 2023, and then to 18% in 2024
Scrapping the Income Tax additional rate of 45%, lowering the tax rate to 40% for income above £150,000
Lowering the VAT headline rate, currently 20%
Raising the threshold for inheritance tax, currently £325,000
PolicyEngine shows that the combined Income Tax reforms — lowering the basic rate to 18% and scrapping the additional rate — would cost £10.1bn per year, reduce poverty by 0.3%, benefit 71% of the public, and disproportionately increase the income of higher-income households.¹
How Income Tax works
Income Tax nominally has four bands: a Personal Allowance, which is untaxed, and then a progressive structure of Basic (20%), Higher (40%), and Additional (45%) rates.
However, because Personal Allowance phases out, Income Tax has six segments instead of four. Income in the Personal Allowance phase-out region (between £100,000 and £125,140), is taxed at a 60% marginal rate, as shown in this PolicyEngine graph.
National Insurance and means-tested benefits significantly increase marginal tax rates, especially among low-income people, some of whom face marginal tax rates up to 69%. See our report on the Autumn Budget Universal Credit reforms for information and charts depicting those incentive schedules.
PolicyEngine results
Navigating to policyengine.org shows a Policy screen, and the left panel shows Income tax and Labour income within that. This presents the tax rates that Sunak is reportedly considering changing. The basic rate can be adjusted at the top, and the additional rate can be repealed by setting the rate to 40% to match the higher rate.
PolicyEngine can show the impact of lowering the basic rate to 19%,³ lowering the basic rate to 18%, or repealing the additional rate. It can also model combinations of repealing the additional rate and also lowering the basic rate to 19% or also lowering the basic rate to 18%. The table below summarizes these five policy reforms.
<a href="https://medium.com/media/779bd0682ff1670b0c7d8e2eaf25a5b4/href">https://medium.com/media/779bd0682ff1670b0c7d8e2eaf25a5b4/href</a>
The full combined policy — lowering the basic rate to 18% and repealing the additional rate — would be regressive, in that it would increase the net income more for higher earners than for lower earners, as a share of income.
This policy benefits anyone with annual income exceeding the Personal Allowance of £12,570. But it only lowers marginal tax rates for people in the basic rate band — between £12,570 and £50,270 — and in the additional rate band — above £150,000.
For more results such as intra-decile charts, poverty rates by age, and net income of particular households (like your own!), explore the PolicyEngine links.
Footnotes
[1] This analysis is based on policy and data for October 2021, preceding Autumn Budget Universal Credit reforms that took effect last week. We do not adjust Scottish tax bands.
[2] To produce an Income Tax-only marginal tax rate chart in PolicyEngine, toggle all Would claim [benefit] switches off, and set the person’s age to 70 to exempt them from National Insurance.
[3] The Times estimated that a “1p cut in the basic rate of tax would cost about £6 billion a year”. This may refer to HMRC’s estimate that adjusting the basic rate by 1p would change revenues by 5.75bn in 2023–2024 and in 2024–2025. It may also, erroneously, trace to the Liberal Democrats’ 2017 Manifesto, which calls for a “1p rise on the basic, higher and additional rates of Income Tax to raise £6 billion”. PolicyEngine estimates that raising each rate by 1p would raise 5.9bn. But, in line with our 4.4bn estimate for raising only the basic rate, HMRC estimates that adjusting the basic rate by 1p would change revenues by 4.7bn in 2022–2023 (HMRC also does not adjust Scottish taxes in this analysis, and unlike PolicyEngine, they also do not adjust Welsh taxes).
Updated 2021–12–06 to incorporate Autumn Budget Universal Credit reforms to the baseline policy.
Income Tax cuts Rishi Sunak is reportedly considering was originally published in PolicyEngine on Medium, where people are continuing the conversation by highlighting and responding to this story.