Are You About To Pay More Income Tax?

In an attempt to trim the UK’s budget deficit, the coalition Government have taken a range of bold steps to reduce expenditure and increase the money coming into the Treasury’s coffers.

Now, an estimated 700,000 British taxpayers are set to pay more income tax after the announcement that the Government is to lower the threshold at which higher rate (40 per cent) tax becomes payable.

Income tax thresholds to change in 2011

The tax thresholds are altered annually in line with inflation and generally announced in autumn’s Pre Budget Report.  With the proposed changes, the number of people who pay higher rate tax is estimated to rise by nearly three quarters of a million, from 3 million to almost 3.7 million.

Mike Warburton, senior tax partner at Grant Thornton, the accountants, said: “With these extra 700,000 higher-rate taxpayers, we are almost at the record level reached when Gordon Brown was chancellor, when there were 3.87 million higher-rate taxpayers.”

Higher rate threshold coming down every year

Recent changes in the structure of the tax system have been the reason for this huge increase in higher rate taxpayers.  When the Government increased the tax free allowance to drag a million low paid workers out of paying any tax at all, they simultaneously reduced the threshold at which top rate tax became payable in order that the middle classes did not benefit.

This tax year (2010/11) all earnings above £43,875 are taxed at 40 per cent.  However, from April 2011 this threshold will be lowered to £42,475, the Treasury has confirmed.

Mr Warburton said: “I’m all in favour of raising the lower threshold. But the Coalition was desperate not to be seen benefiting the middle classes. The threshold at £42,475 is only 1.6 times average earnings, which many people will consider a relatively low income to pay such a high rate of tax.”

National Insurance also rising

In addition to the lowering of the tax threshold, National Insurance (NI) rates for higher rate taxpayers will also rise in April 2011.  The rate of NI will rise from 11 per cent to 12 per cent.

Patricia Mock, a director in the private clients practice at Deloitte, said: “People earning between £40,000 to £50,000 and upwards will be significantly worse off than before.” The firm has calculated that anyone earning £50,000 will be £747 worse off next year.

She pointed out that from April 2013 higher-rate taxpayers with children will face a further blow when they lose out on child benefit.  This will cost a family with two children an additional £1,750 per year.

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