High earners will be hit with an income tax rate of 45 per cent as part of a package of measures announced yesterday – but it was not all bad news for the well off.
In what was described by the chancellor as “the fairest approach” to help families through recession, the new upper rate will fund a series of cuts and credit increases for those less well off.
Baker Tilly’s Birmingham-based tax partner Bill Longe said there was a silver lining to the new rate.
He said: “It is not all bad news as those paying tax at this new higher rate will find pension contributions cheaper. Whereas currently every £1,000 of pension contribution costs £600, it will only cost a 45 per cent taxpayer £550.
“To avoid the national insurance increases in the upper earnings limit and the 0.5 per cent increases for employers and employees, pension contributions by the employer under a salary sacrifice arrangement will be more tax efficient.”
In a bid to further help low earners hit by the abolition of the 10p income tax rate, the Chancellor announced that temporary increase in their personal allowance would be permanent. It will be increased, making them £145 a year better off from April. This would help 22 million basic rate tax payers, according to the government.
Stephen Quest, partner at Grant Thornton, said the new tax rates could harm wealth creators.
He said: “The people really hit are the high earners. There will not be a lot of sympathy but will it mean the talent goes offshore?”
Employers and workers on medium and high incomes will be hit by a rise in national insurance contributions from 2011. But those earning less than £20,000 will be exempt.
According to Narinder Paul, tax partner at KPMG in Birmingham, high earners will be hit from all directions. He said: “High income earners have had a triple whammy in the Pre Budget Report with the culmination of the removal of the personal allowance for individuals earning over £140,000 from 6 April 2010, and an increase in the income tax rate rise from 40 to 45 per cent, as well as increase in national insurance contributions by 0.5 per cent from 6 April 2011. The effect of these three changes in 2011 will see an individual earning just over £150,000 facing a reduction in income of seven per cent.”
Other moves to help hard-pushed households include a rise in Child Tax Credit in April above that originally announced.
Pensioners will see their credits rise from £124 to £130 a week for individuals and £189 to £198 for couples.
Increases in Child Benefit will be introduced in January – three months early – and every pensioner will receive a one-off payment of £60 in the new year.
Leonie Kerswill, tax partner at PricewaterhouseCoopers said the measures as a whole would affect those at the extremes of the pay scale.
“Those earning less than £20,000 should be winners. Those in the middle will be generally worse off because of the national insurance changes.
“But a lot of the people who generate the wealth will be worse off.”