December 7, 2021

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How much tax will I pay? UK income tax rates explained and any changes to expect in Budget 2021

One of the biggest question on Budget day is how much tax we might be expected to pay from now on.

It is thought that Mr Sunak is unlikely to make any sweeping tax changes today, after his manifesto-busting national insurance hike

So how much tax do we have to pay? Here’s everything you need to know.

What are the current income tax rates?

Income tax is the tax you pay on money you earn from working.

How much income tax you pay in each tax year depends on:

  • How much of your income is above your personal allowance
  • How much of your income falls within each tax band

The standard personal allowance is £12,570. This means anyone who earns less than this per year does not have to pay any income tax, and anyone who earns more does not have to pay income tax on £12,500 of their total earnings.

Britain's Chancellor of the Exchequer Rishi Sunak holds the budget box outside Downing Street in London, Britain, October 27, 2021. REUTERS/May James
Rishi Sunak will unveil his Autumn Budget in the Commons today
(Photo: REUTERS)

Your personal allowance may be larger if you claim marriage allowance or blind person’s allowance, or smaller if you earn over 100,000.

After that, the amount of income tax you pay increases with how much you earn.

  • On earnings between £12,571 and £270, you pay the basic rate of 20 per cent
  • On earnings between £50,271 and £150,000, you pay the higher rate of 40 per cent
  • On earnings over £150,000 you pay the additional rate of 45 per cent

What about National Insurance?

National Insurance contributions increased in September as a result of a controversial 1.25 percentage point tax hike introduced as part of social care reforms.

The move has been made so that more cash can be spent on the social care system. This is not free for everyone, unlike the NHS, and includes the provision of care homes.

The Government announced on 7 September that those who do not have assets worth more than £20,000 will be given social care free of charge and that social care will be capped at £86,000 over a person’s lifetime.

Boris Johnson confirmed to Parliament that the new tax rates will come into force from April 2022.

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In the current system people pay 12% on earnings between £9,568 and £50,270, and 2% on any income above £50,270.

Here’s how your National Insurance payments will be impacted by a rise of 1.25 percentage points:

  • People earning £10,000 a year currently pay £52 – they will pay £5 more each year (£57) as a result of the rise
  • Those on a £20,000 salary now paying £1,251 a year will pay £130 extra, a total of £1381
  • People earning £30,000 a year now paying £2,452 will pay £255 extra, £2707 in total
  • For those on a £40,000 salary currently paying £3,652, a rise of 1.25 percentage points means they’ll have to fork out £380 extra each year, bringing the total to £4032
  • People who earn £50,000 a year now pay £4,852 – the tax hike means an increase to £5357, an annual increase of £505

What about council tax?

There are reports Rishi Sunak could raise council tax at today’s Autumn Budget.

The Chancellor refused to rule out such a move at the Tory Party conference at the start of the month, and the Institute for Fiscal Studies (IFS) has warned that an increase may be necessary to keep up with councils’ demand.

The Chancellor refusing to rule it out at conference means it could certainly happen, but the Government is yet to announce anything, and no details about council tax have been leaked, despite plenty of Mr Sunak’s other plans already being reported.

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Ministers may be keeping tight lipped about such plans, as they would be largely unpopular, or the Chancellor may simply have decided that now is not the time to raise council tax, especially after a 1.25 per cent National Insurance increase was unveiled earlier this year.

What about other taxes?

Corporation tax is also already set to rise from 19 to 25 per cent from April 2021, but Mr Sunak faces pressure to ensure government revenue meets spending pressure.

In the coming budget, inheritance tax rates are not expected to change, but the Chancellor is expected to raise capital gains tax, which was frozen until 2026 in the last Budget.

He is not expected to raise VAT, and more than 200 CEOs from the country’s biggest hospitality groups called for him to keep VAT at 12.5 per cent.

Mr Sunak cut Vat in hospitality from 20 to 12.5 per cent during Covid, but this is set to revert back in April next year.

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Sector chiefs said keeping VAT at 12.5 per cent would “put a half to price rises for hard-working families” and would also enable the industry to generate new jobs, support higher wages for staff, help boost green initiatives, and allow Britain to “remain globally competitive”. 

Other new announcements could be changes to Student Loans, with the Guardian reporting annual fees could be slashed to £8,500, down from £9,250. 

The Chancellor may also lower the threshold at which people start repaying their student loans, which could save the Treasury about £2bn a year.

What polices have been announced already?

  • Public sector pay rise: Millions of nurses, teachers and members of the armed forces will receive a pay rise next April after a pay freeze is lifted. The exact details of the pay rise are yet to be determined.
  • Minimum wage rise: The minimum wage for workers aged 23 and over will rise from £8.91 an hour to £9.50 from 1 April. Younger workers, including apprentices, will also benefit from a pay increase.
  • ‘Levelling up’ transport: Nearly £7bn is to be given to metro areas including Greater Manchester, the West Midlands and South Yorkshire for projects ranging from tram updates to introducing London-style improvements in infrastructure and fares.
  • £6bn boost to the NHS: A £6bn package is to be given to the NHS to help tackle backlogs and invest in technology and data in a bid to improve efficiency and security within the health service.
  • Skills ‘revolution’: A £3bn investment will be given to post-16 education to boost technical training. Mr Sunak will also announce that the number of skills boot camps in areas such as artificial intelligence and cybersecurity will be quadrupled.
  • Educational funds for children with special needs and disabilities: New school places for children with special educational needs and disabilities will be created with a £2.6bn package. The Treasury is also expected to nearly triple the amount of this year’s capital funding for the most disadvantaged young people through specialised educational support, with up to 30,000 new spots made available.
  • Housing on brownfield sites: A £1.8bn pot is to be invested by the Government in building new homes on derelict or unused brownfield sites in England.
  • Border protection: Ageing Border Force vessels will be replaced with new cutters as part of a £700m investment to improve the safety of Britain’s borders. The announcement also includes £628m “to modernise and digitalise” the border, with proposals including a US-style Electronic Travel Authorisation for tourists wishing to come to the UK.
  • Crime prevention: A £435m package of measures aimed at preventing crime will focus on violent offences against women. The Chancellor is expected to pledge millions for better CCTV and improved street lighting and give £80m in additional funding to the Crown Prosecution Service.
  • Maths coaching: Up to 500,000 adults will be given access a £560m scheme to improve their numeracy skills, after it was revealed more than eight million people in England have maths skills lower than those expected of a nine-year-old, with the North East, West Midlands and Yorkshire and the Humber worst affected.
  • Sports: Football pitches, tennis courts and youth facilities will see £700m of funding to support the next generation of young talent.
  • Museums and galleries: Over three years, £850bn will “breathe life” back into cultural hotspots, with the money being used to restore and upgrade institutions including the V&A museum and Tate Liverpool.
  • Family hubs: A range of investments to give children the “best possible start in life” totaling £500m will be announced by the Treasury. The money is set to go towards support for families and children, including new family hubs.
  • Global Britain Investment Fund: The £1.4bn fund will encourage foreign investment into UK businesses and attract overseas talent.
  • Covid: A six-month extension to the COVID recovery loan scheme to June 2022.
  • Cutting-edge treatment for veterans: Innovative surgery which allows artificial limbs to be permanently fixed to bones could be made available to veterans through research grants handed out by a new fund. Some £5 million will be put towards a new UK-wide Veterans’ Health Innovation Fund at the Budget and spending review on Wednesday.