Higher-rate taxpayers will typically be hundreds of pounds worse off as a result of changes to income tax and National Insurance due to take effect next April, according to HM Revenue & Customs (HMRC) calculations published in this week’s Budget.
Accountants also estimate that another 700,000 people with incomes of about £42,000-£43,000 are set to be hit with 40 per cent tax for the first time as part of the new chancellor’s tax plans.
John Whiting, tax policy director at the Chartered Institute of Taxation, said: “This was a Budget with a lot of [personal tax] pain in it that wasn’t overtly spelt out.”
George Osborne’s big announcement on income tax was that the tax-free personal allowance for under-65s will rise £1,000 to £7,475 in 2011/12. This, he said, would benefit 23m basic-rate taxpayers – saving them up to £200 each – and take 880,000 of those on the lowest incomes out of tax altogether.
There was no confirmation of what will happen to the personal allowances of pensioners, which are generally already higher.
But, in order to claw back the benefit of the allowance increase from higher-rate taxpayers, the level at which 40 per cent tax becomes due is being reduced to about £42,375 in 2011/12, from £43,875 currently. This higher-rate threshold will also come down from £37,400 to £34,900 for individuals on incomes over about £115,000 who no longer receive personal allowances.
The lowering of the threshold means that more of a higher-rate taxpayer’s income becomes taxable at 40 per cent rather than 20 per cent.
For most higher-rate taxpayers, the hit from the lower threshold will outweigh the benefit of the allowance increase by £100. But high earners who no longer benefit from personal allowances will be £500 worse off.
“While the chancellor said higher-rate taxpayers won’t benefit from the increase in the allowance, what he failed to say was they are actually going to be worse off,” noted Nicola Roberts, tax director at Deloitte, the accountants.
In addition, most higher-rate taxpayers will be further out of pocket from the one percentage point increase in employees’ national insurance contributions (NICs), planned by the previous Labour government, that is still going ahead from April 2011.
This rise will take the standard NIC rate to 12 per cent and the higher rate to 2 per cent, at a typical cost of hundreds of pounds for higher earners.
Overall, accountants said that individuals earning more than about £42,500 will be worse off from this package of income tax and NIC changes – while those earning below this level gain up to a few hundred pounds.
An employee earning £50,000 will be £215 worse off next year, while those on £100,000 incomes will lose £715, rising to £1,615 for incomes of £150,000, according to HMRC.
Meanwhile, the reduction in the higher-rate threshold will lead to basic-rate taxpayers with incomes just below the current £43,875 figure becoming 40 per cent taxpayers next year – even if their incomes do not rise.
Grant Thornton, the accountancy firm, estimates that lowering the threshold to £42,375 could catch another 700,000 individuals in the 40 per cent tax net, and push up the the total number of higher-rate taxpayers to nearly 4m.
The chancellor also announced in the Budget that the higher-rate threshold would remain frozen until 2013/14, which is likely to draw more middle-earners into the 40 per cent net as incomes rise and mean that existing higher-rate taxpayers pay 40 per cent tax on more of their incomes.
“The situation is set to get worse because of this planned freeze – this is classic ‘fiscal drag’,” said Mike Warburton, senior tax partner at Grant Thornton.