Higher earners who avoided 50 per cent tax on £1bn can now defer income until next April to benefit from a new 45p top rate. By then, nearly a million lower earners will be able to avoid tax completely – thanks to a two-stage increase to the personal tax allowance. But it will be middle-income parents who have most to lose from this year’s Budget – in spite of measures to help them avoid the “cliff edge” of a sudden loss of child benefit.
In justifying a widely expected cut to the top rate of income tax, the chancellor claimed the introduction of the 50p rate in 2010 meant “an astonishing £16bn of income was deliberately shifted into the previous tax year – at a cost to the taxpayer of £1bn”. As a result, the increase from 40p to 50p raised only one-third of the £3bn expected.
However, in an irony not lost on tax advisers, Wednesday’s advance warning of a lower 45p rate from April 2013 is expected to see the same high earners reverse their strategy.
“Just as taxpayers accelerated income ahead of the new rate, they will now be deferring income until after April 2013,” said Tony Bernstein, senior tax partner at HW Fisher & Company chartered accountants.
Mark Groom, partner for employer taxes at Deloitte, said giving a year’s notice of the cut would mean less tax was paid. “This move provides an extended opportunity for deferring income into 2013/14 and the Budget forecast includes a £2.4bn cost in 2012/13 as a result of forestalling the rate reduction.”
“If you own your own business, you will defer paying yourself a bonus or a dividend,” explained Richard Proctor, tax partner at Grant Thornton. “Those with savings will also seek to invest in products that pay taxable income after April 5 2013.”
Personal tax allowances
Lower and middle-income earners will get an effective tax cut through an increase to the personal tax-free allowance. This universal allowance will be raised to £9,205 – just short of the Lib Dems’ £10,000 target – by April 2013. It will come in two stages: rising by just £630 to £8,105 in two weeks’ time, before increasing by £1,100 in a year.
But Patrick Stevens, tax partner at Ernst & Young, noted that the measure will not mean “millions of the lowest paid are lifted out of tax altogether” as the chancellor claimed – merely 840,000 on Treasury estimates, and not until tax year 2013/14. Nor will the lowest earners necessarily benefit. “The increase is unlikely to help the poorest taxpayers, many of whom will lose in means-tested benefits what they gain in tax terms,” he added.
Some will continue to pay higher marginal tax rates as they will lose their personal allowance if they earn more than £100,000.
Some higher earners will receive one-quarter of this extra tax-free allowance – not the case under previous Budget increases – because the threshold at which they pay 40 per cent tax will come down by 75 per cent of the amount the allowance rises. “The higher rate band is being reduced to £32,245 to restrict the benefit for higher rate taxpayers, indicating a saving of just £15 per annum for those in the income range £41,250 to £100,000,” calculated Patricia Mock, tax director in the private client services practice at Deloitte.
Those earning more than £118,000 will not benefit all, though – as the personal allowance will continue to be tapered down by £1 for every £2 of income above £100,000. For another year, this means people in this earnings bracket will pay a much higher effective rate of tax. “While the good news for high earners in the Budget will see the 50 per cent tax band being reduced to 45 per cent from April 2013, a bigger anomaly still exists – a 60 per cent income tax band,” pointed out Andrew Tully of pension provider MGM Advantage.
Pensioners’ tax allowances
In a surprise move, pensioners will also gain no more benefit from the policy of higher personal allowances – as the higher age-related allowances that they can be claim from age 65 will be frozen, until they are equalised with the standard personal allowance.
This so-called “granny tax” will hit low-income pensioners, claimed Katharine Arthur, tax partner at MHA MacIntyre Hudson. She noted that, in the next tax year, 65-74 year olds will have an allowance of £10,500, while those 75 and above will have £10,660 – if their income does not exceed £25,400. But freezing and unifying the allowance will expose more of a pensioner’s income to tax. “This change is a move towards universal personal allowances for all,” she said, “In the meantime, this means that many taxpayers over 65, on lower incomes, will pay more tax in the future, as they will not benefit from the enhanced allowances.”
Tax and child benefit
Middle-income parents face the biggest loss, however – and some will be forced to fill in tax returns just to pay back any child benefit they still receive.
From April 2013, child benefit was due to be abolished for those households where one parent earned more than £42,475 and qualified as a higher-rate taxpayer. Since this policy was first announced in 2010, critics have pointed out that it created a “cliff edge”, whereby average annual child benefit of £1,700 – for two children – would be lost as soon as a parent earned £1 more than the threshold. In addition, the threshold created an anomaly whereby a family with an £84,950 income split between two parents kept their child benefit.
Under a new tapering system announced in the Budget, child benefit will now be phased out for those earning between £50,000 and £60,000. But tax advisers warned it would mean more people doing paperwork for less. “Contrary to the chancellor’s stated aim of simplifying the tax system – this introduces an additional level of complexity to the personal tax system and will increase the number of individuals who will need to complete tax returns,” said Mr Stevens of Ernst & Young.
“Proving eligibility, or a claim for child benefit, where earnings fluctuate above £50,000 will be a chore for many and may cost more to administer than it is worth,” added Frank Nash, a senior tax partner at London Chartered Accountants Blick Rothenberg.
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