The Institute of Fiscal Studies has estimated than an extra 750,000 people will be lifted into the 40% tax band this April, as a result of changes in the basic and higher tax thresholds for 2011-12.
20% and 40% tax thresholds changed
The changes come about as a result of the government’s pledge to increase the amount of tax-free personal allowance from £6,475 to £7,475 from April 2011. This means that those who earn less than £7,475 will now pay no income tax at all.
Those who have higher incomes will pay 20% tax on the next £35,000 they earn and 40% tax on any amounts above this, until they reach the highest rate of tax, 50%, paid on income above £150,000.
The threshold above which you pay 40% tax on taxable income has fallen from £37,400 to £35,000 to make sure that higher earners don’t benefit from the increase in personal allowance, which was designed to help low earners rather than taxpayers generally.
The changes mean that those whose income is over £42,475 (i.e. £35,000 plus personal allowance of £7,475) will pay 40% tax on their earnings above this amount. In 2010-11 around 3m paid 40% tax on some of their income, but the threshold for this was £43,875.
National Insurance to rise
April 2011 will also see a rise in National Insurance rates, from 11% to 12% for employees and from 8% to 9% for the self-employed. To protect low earners, the threshold for National Insurance will rise to £7,225.
Individuals with earnings above £42,475 will have National Insurance deducted at 2% on the uppermost slice of their pay, as well as National Insurance at 12% deducted from earnings below this threshold. Previously, employees would have ‘higher rate’ national insurance deducted from earnings of above £43,875, and this was only charged at 1%.
Other tax and benefit changes
In addition, child benefit will be withdrawn from households with a higher rate taxpayer from January 2013. As the threshold for 40% tax has fallen, more people will also be affected by this provision.
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