Pain on the way for highest earners

High earners face a series of tax rises in just over a week’s time – or from next April if they are buying a million-pound property – in spite of no new tax rates being announced in the Budget. While the chancellor confirmed that: “I have no further announcements on VAT, on income tax, or National Insurance rates”, increases announced in last year’s Budget and pre-Budget report take effect from April 6 this year and next – affecting individuals with six-figure incomes.

“Being a pre-election Budget, we didn’t expect much immediate pain for the average taxpayer,” said Steve Folkard of AXA Life. “However, it is best not to forget the considerable changes already targeted at wealthier individuals that are in the pipeline to take effect from April 6 2010.”

In his speech, the chancellor confirmed four key tax increases for high earners:

● a 50 per cent top rate of income tax, from April 6, for those earning more than £150,000;

● a tapering down of the personal tax allowance, currently worth £6,475, for those earning more than £100,000, so that it is completely withdrawn for those earning £112,950 or more;

● a restriction on higher-rate pension tax relief for those earning more than £130,000;

● a freezing of the inheritance tax nil rate band at £325,000.

Income tax

A top tax income rate of 50 per cent will apply to all income from April 6, and is expected to remain in place no matter which party wins the next election. “It is clear that additional tax on high earners is here to stay,” warned John Richardson, head of advice policy at Towry Law.

Grant Thornton calculated that the 50 per cent rate would increase the tax bill for someone earning £200,000 by £2,600 a year, with the total loss of the personal allowance adding another £2,590.

Restrictions on higher-rate pension tax relief to £20,000-worth of regular contributions (or £30,000 if higher contributions were made in the previous three years) results in another £1,200 in extra tax. But from 2011, the high earner of £200,000 faces another £10,800 in tax.

“These individuals therefore need to seek financial planning advice to minimise the impact of the reduction in the personal allowance for those earning over £100,000 and the restriction in pensions tax relief for those with income exceeding £130,000,” said Mr Richardson.

Tax allowances

Some higher earners will even find themselves paying an effective income tax rate of 60 per cent from April 6, due to the tapering down of the personal allowance – a quirk of the new tax rules that was not addressed in this year’s Budget. “The Chancellor didn’t take the opportunity to remove the anomalous 60 per cent rate on income tax, meaning that highest rate is felt by those earning £100,000 to £112,950, rather than those more highly paid,” pointed out Chris Sanger, head of tax at Ernst & Young.

Lower earners were not spared tax rises, however, as the chancellor has now frozen personal allowances for all. Karen Barrett, of unbiased.co.uk, the professional advice website, said: “This ‘stealth tax’ is far greater than those previously attempted – personal allowances were last frozen over a decade ago.”

Only older pensioners benefit , with a higher allowance of £10,000 being introduced for over 75s from April 6 2011.

National insurance

A 1 per cent increase in national insurance from April 6 2011, also announced in last year’s Budget, was again confirmed – but some tax advisers suggested any new government would review it. “Given that the impact will not be felt for over 12 months, a future chancellor may reconsider the choice between national insurance or an increase of VAT,” said Graham Farquhar, of Ernst & Young.

Stamp duty

An immediate extension of the stamp duty “holiday” to properties worth up to £250,000 for first-time buyers is expected to exempt nine out of 10 new househunters from the tax, until March 25 2012. However, the measure is to be paid for by an open-ended increase in the stamp duty rate on properties worth £1m or more from 4 to 5 per cent from April 2011. “This will cost buyers a minimum of an extra £10,000 on their property – another hit to the pocket of many of those already impacted by the 50 per cent income tax rate,” said Chris Maddock at Vantis.

Inheritance tax

Wealthy property owners are also more likely to leave a tax bill for their beneficiaries, following the announcement that the nil-rate band for inheritance tax is being frozen at £325,000 for a further four years.

KMPG said the move represented a U-turn on the £350,000 threshold that had been previously announced. Frank Nash, senior tax partner at Blick Rothenberg said: “ The freezing of the inheritance tax band for a further four years could cost a couple an additional £37,000 in IHT in real terms. We are not just talking about wealthy families, who will be hit. The chancellor’s plans will affect married couples or civil partners who are jointly worth more than £650,000.”

Capital gains tax

Business owners and shareholders were offered one unexpected tax break: an extension of the “entrepreneurs’ relief” for capital gains tax (CGT) from £1m worth of lifetime gains to £2m. But tax advisers forecast increases to CGT after the election – no matter which party wins.

“Sitting behind all of these potential moves is one glaring anomaly: the disparity which now exists between the top rate of tax on income, shortly to become 50 per cent, and the rate of tax on capital gains, now only 18 per cent,” said Folkard of Axa. “It surely hasn’t escaped the chancellor that this is a massive difference, but closing the gap will not be a quick measure as it would be entirely unfair to make a change effective prior to the next tax year.”