22 April 2009

Top rate of income tax could be 60%, not 50%

OK bear with me here, but I think my maths is correct....

In the budget, the Chancellor has just announced that the top rate of tax for people earning over £150,000 per annum will rise to 50% for income over that amount. Cue headlines "Top rate of tax now 50%". BUT, personal allowances are being withdrawn from people who earn over £100,000, with a cut of £1 of allowance, for every £2 earned over £100,000. (see page 109 of this document).

In 2009/10 the basic personal allowance is £6,475 - so anyone earning over £112,950 will get no personal allowance and instead they will pay 40% tax on their earnings over (in 2008/09) £34,600. What I am not clear about is whether the ending of the personal allowance lowers the rate at which higher rate tax payers enter the higher band or whether it is at the same overall level - i.e. that they pay the basic rate for longer.

Assuming it is the former, then the previously tax free personal allowance will effectively be taxed at 40% as well (or at least at 20%).

So, if you earn £100,000 and your salary increases by £2000, you will pay £800 on the increase, plus lose £1000 of personal allowance, so will be paying an additional £400 in income tax - total tax burden on the additional £2000 = £1200 or 60%.

Even if the loss of the personal allowance means you are paying only 20% on that element, the burden will be £1000 (£800 plus £200) on a £2000 increase - 50%.

As ever, the budget is rife with spin and misdirection, but it should be crystal clear that the marginal rate of tax is rising for people earning over £100k, and not just at £150k.

blog comments powered by Disqus