Higher-rate taxpayers face paying hundreds of pounds more in income tax and national insurance (NI) from next month, regardless of any new measures that may be announced in the Budget on Wednesday.
Accountants say that this Budget is unusual in that most of the main personal tax changes for the new tax year appear to have already been announced.
“The majority of the pain for 2011/12 is known,” says John Whiting, tax policy director at the Chartered Institute of Taxation, adding that individuals should also not expect substantial giveaways from the chancellor’s Budget speech.
Higher earners, in particular, are set to be squeezed by planned increases in NI contributions and a lowering of the 40 per cent tax threshold – and could also be hit by the new £50,000 limit for pensions tax relief as well as a higher 5 per cent rate of stamp duty on £1m property purchases.
“The main weight [of tax increases] is falling on those with the broadest backs,” notes Mike Warburton, tax director at accountants Grant Thornton.
For most higher earners, the biggest extra tax cost is likely to be the one percentage point increase in NI contribution rates.
This was announced by the last Labour government, and is finally due to take effect from April 6.
NI contributions, payable by the employed and self-employed (but not by investors or pensioners), will rise to 12 per cent and 9 per cent respectively on earnings up to £42,475, with 2 per cent on higher incomes. This hike alone is set to cost most higher-earners hundreds of pounds, while those on incomes below about £30,000 should be no worse off overall thanks to an increase in the lower “primary” income threshold at which NI becomes payable.
At the same time, the income level at which 40 per cent tax becomes payable is being reduced to £42,475. This is expected to draw 750,000 middle earners into the 40 per cent band for the first time in 2011/2012 and, says Grant Thornton, take the number of higher-rate taxpayers close to the peak levels of just before the recession. Existing higher-rate taxpayers will also pay 40 per cent on more of their earnings.
The higher-rate tax threshold is being lowered to claw back the benefit of the previously announced £1,000 increase in the standard personal allowance to £7,475.
For most higher-rate taxpayers, the hit from the lower 40 per cent threshold will outweigh the benefit of the allowance increase by £80 over the coming year. But high earners with incomes above £114,950, who no longer benefit from personal allowances, will be £480 worse off, according to Grant Thornton.
The planned increase to 2 per cent in the higher rate of NI also means that higher-rate taxpayers will be subject to combined tax and NI deductions of 42 per cent on the top slice of their earnings.
Top-rate taxpayers will lose 52 per cent, a level of deductions where they will be “working more for the government than themselves”, says Whiting.
Tax relief on pension contributions is also set to become less generous from next month for some high earners.
Tax relief will be restricted to pension contributions of £50,000 a year from April 6, compared with the £255,000 maximum for the current tax year, although many high earners were already subject to lower limits of £20,000 to £30,000 under rules that are also now being scrapped.
“The instinct for individuals who have been hit by the 50 per cent top rate and withdrawal of personal allowances has been to put more in to their pension,” says Whiting. “The allowance changes hit contribution flexibility.”
Laith Khalaf, pensions analyst at Hargreaves Lansdown, the financial adviser, says that while, for many high earners, the new £50,000 limit amounts to a relaxation of previous restrictions, “it throws the focus back on regular, annual pension-saving.”
Wealthy people buying properties costing more than £1m from next month will also be subject to a new 5 per cent rate of stamp duty, costing them at least £10,000 more compared with the previous 4 per cent top rate of duty.
Furthermore, the increase could prove unwelcome for wealthy homeowners, as
it may put downward pressure on prices in what has been the relatively resilient top-end of the housing market even if, as the Council of Mortgage Lenders concedes, it “will probably not evoke a great deal of public sympathy”.