Chancellor Kwasi Kwarteng has scrapped the top rate of income tax for the highest earners in his mini-Budget.
The controversial move will only affect those who earn over £150,000 a year, helping them take home more of their pay packet.
He also brought forward the planned cut to the basic rate of income tax to 19p in the pound – a decision that is also likely to disproportionately benefit higher earners.
Here are all the changes to income tax explained, and how they will affect you.
How is income tax being cut?
The 45 per cent income tax rate is being scrapped from April 2023.
At present, people must pay 45 per cent income tax on all earnings over £150,000.
From April the highest tax bracket will be the 40 per cent rate, which is paid on all earnings over £50,271.
The basic rate of income tax will be cut from 20p to 19p, also from April 2023.
This plan had already been announced by the previous chancellor, Rishi Sunak, but was due to take effect in 2024.
It means that on all earnings between £12,571 and £50,270, people will only have to pay 19 per cent income tax, rather than the current 20 per cent.
How will the tax cuts affect me?
The Government said the move to scrap the 45 per cent tax rate “is designed to attract the best and the brightest to the UK workforce, helping businesses innovate and grow”.
However, it will only benefit around 660,000 people – the highest earners in the UK – while making no difference to lower-income households.
Treasury officials said more than 600,000 of the country’s richest earners will get a £10,000 a year tax cut due to the axe of the higher rate.
Data from tax advisory firm Blick Rothenberg suggests that the 1p cut to the basic rate would save £124.30 a year for those on a salary of £25,000 and £224.30 a year for workers earning £35,000.
It would work out to a £674 and £874 saving for workers with an income of £80,000 and £100,000, respectively, meaning the policy disproportionately benefits higher earners.
Responding to the statement, Shadow Chancellor Rachel Reeves said the mini-Budget will be toasted in boardrooms, while working people “pay the bill”.
Rebecca McDonald, chief economist at the Joseph Rowntree Foundation charity, said the Government had chosen to “turn its back on millions who are on the lowest incomes”.
“This is a budget that has wilfully ignored families struggling through a cost of living emergency and instead targeted its action at the richest,” she said.
“Families on low incomes can’t wait for the promised benefits of economic growth to trickle down into their pockets.”
The combined cost of all the tax cuts announced by Mr Kwarteng will be almost £45bn by 2026-27. The Treasury said it would ask the Debt Management Office to raise an additional £72bn to help fund the cuts.