The Resolution Foundation reports that the new tax year 2022-23 brings a number of immediate changes that will affect household incomes. Most benefits are rising by only 3.1%; the National Living Wage is rising by 6.6% to £9.50 an hour; while the energy price cap is rising by 54%.

Council Tax will rise by about 3.4% but around four in every five households will receive a £150 rebate in April through the Council Tax system; a 5p Fuel Duty cut has already taken effect; and VAT on hospitality has now returned to its pre-pandemic rate of 20%. But there are also a number of direct tax changes:

  1. The four-year freezing of Income Tax thresholds begins, alongside a freezing of Inheritance Tax, Capital Gains Tax and VAT thresholds. This will not mean a nominal jump in anyone’s tax bills, but means that the personal allowance will remain at £12,570 rather than rising to £12,960. Additionally, the higher-rate threshold will remain at £50,270.
  2. Tax rates for dividend income are rising by 1.25%, as part of the ‘Health and Social Care Levy’ package. This only affects people with over £2,000 of dividend income.
  3. Most significantly, all National Insurance (NI) rates will rise by 1.25% in April. This effects employers, employees and the self-employed, and means that the basic NI rate for employees will rise from 12% to 13.25%.
  4. Working in the opposite direction, however, the starting point for paying non-employer NI is rising in April from an annual equivalent of £9,568 to £9,880 – in line with the rate of inflation last autumn – but will then, as announced in the Spring Statement, jump to £12,570 in July.

The overall impact of these policy choices on people’s incomes will be complex, as changes in allowances and thresholds interact in complicated ways with changes in rates. However, in isolation they are more straightforward and can be characterised as follows:

  • The freezing of the Income Tax personal allowance will leave almost all of the 33m people who pay Income Tax each year around £80 worse off. The freezing of the higher-rate threshold will leave higher (and additional) rate payers an extra £160 worse off.
  • The personal NI rate rise will only affect earnings but, as an extra 1.25% tax on annual earnings above £9,880 (in April), it will mean additional tax of around £200 a year for someone earning £27,000, and around £1,100 for someone earning £100,000.
  • The significant increase in the NI threshold will mean a tax cut of £270 across 2022-23 (accounting for the fact that it does not take effect until July) for employees earning above the new threshold, and will also take around 2 million workers out of direct tax altogether.
  • Those affected by these changes and also receiving Universal Credit (UC) will only get 45% of any tax cut (or pay 45% of any tax rise), as the benefit is tapered against net earnings, so higher net earnings lead to a reduced UC award.

To full research article can be found here.