Changes to Income Tax Thresholds: Impact on Taxpayers and Tax Relief Options
Income tax serves as the government’s primary source of revenue in the UK. Recent changes to income tax thresholds have raised concerns among taxpayers, as millions are expected to pay higher taxes. This article aims to provide an overview of the current income tax thresholds, the freezing of allowances, and the implications for taxpayers. Additionally, we will explore various tax relief options available to individuals and businesses.
Income Tax Threshold Changes
Chancellor Jeremy Hunt has announced a freeze on income tax thresholds until April 2028. This decision means that the income tax personal allowance will remain at £12,570, and the point at which higher tax rates apply will be left unchanged. As a result, individuals will pay tax on a larger portion of their earnings as their wages increase, potentially pushing them into higher tax brackets.
Impact on Taxpayers
The Office for Budget Responsibility (OBR), an independent body responsible for evaluating economic plans, estimates that this freeze will result in an additional 3.2 million individuals becoming taxpayers. Furthermore, the OBR projects that 2.6 million more people will fall into the higher rate tax bracket.
Projected Revenue and Economic Implications
The freeze on income tax thresholds aims to generate an additional £25.5 billion per year by 2027-28, compared to if the thresholds were adjusted in line with the Consumer Price Index (CPI) inflation measure. These increased revenues will play a crucial role in funding public services and government initiatives.
Current Income Tax Rates and Bands
For the tax year from April 6, 2023, to April 5, 2024, the following income tax rates and bands apply:
Personal Allowance: Up to £12,570 (0% tax)
Basic Rate: £12,571 to £50,270 (20% tax)
Higher Rate: £50,271 to £125,140 (40% tax)
Additional Rate: Over £125,140 (45% tax)
Tax Relief Options
In addition to the income tax thresholds, taxpayers may be eligible for various tax relief options, including:
Business Expenses for Self-Employed Individuals:
Self-employed individuals, such as sole traders or partners in a partnership, can claim tax relief on business expenses. These allowable expenses can be deducted from taxable profits, reducing the overall tax liability.
Allowable expenses include office costs, travel costs, clothing expenses, staff costs, and more. Private purchases made using business funds are not considered allowable expenses.
Work-Related Expenses for Employees:
Employed individuals who use their own money for work-related expenses, such as travel or necessary purchases, may be eligible to claim tax relief.
This relief allows employees to offset their expenses against their taxable income, reducing their overall tax liability.
Capital allowances are applicable when buying assets for business use. Traditional accounting methods allow for claiming capital allowances on equipment, machinery, and business vehicles.
For self-employed individuals using the cash basis accounting method, most items purchased for business use are claimed as allowable expenses. However, cars used for business purposes can still be claimed as capital allowances.
Working from Home Expenses:
Individuals who work from home may be able to claim a proportion of costs such as heating, electricity, Council Tax, mortgage interest or rent, and internet and telephone use.
Calculating the allowable expenses can be based on a reasonable method, such as the number of rooms used for business or the amount of time spent working from home.
The freeze on income tax thresholds until 2028 will impact taxpayers in the UK, potentially leading to more individuals paying taxes and entering higher tax brackets. However, taxpayers can explore various tax relief options available to them. Claiming tax relief on business expenses, work-related expenses, capital allowances, and working from home expenses can help individuals and businesses reduce their tax liabilities. It is advisable to consult with a tax professional to understand and utilize these tax relief options effectively within the existing tax framework.