45 per cent tax rate for high earners

The wealthy could face substantial tax rises

The Chancellor confirmed in his Pre-Budget Report last November his intention to introduce a new 45 per cent tax rate from April 2011 for high earners earning more than £150,000, which is estimated to affect the top 1 per cent of incomes.

Such individuals will face a higher rate of 37.5 per cent on dividends, which is an effective rate of 30.5 per cent. These higher rates will also apply to most trustees. There is also a proposed increase in National Insurance rates of 0.5 per cent for employees, employers and the self-employed.

In addition, there would be a change to the personal allowances of high earners to end the anomaly of these being worth twice as much to higher rate taxpayers as those who pay basic rate tax. The personal allowance, which is £6,035 in this financial year, is the amount of earnings on which no tax is payable and all taxpayers receive the same allowance.

From April 2010, people earning between £100,000 and £140,000 will have their personal allowances halved so they receive the same benefit as those earning less. For taxpayers earning more than £140,000 the allowance will be withdrawn entirely.

From this April, the personal allowance for those under 65 will be increased by £145. This is in addition to the £600 increase from May last year, and increases the total to £6,475. Taxpayers aged between 65 and 74 will see their personal allowance increase in line with inflation to £9,490, while those aged 75 and over will get an annual allowance of £9,640.

Plans were also announced to make permanent last year’s increase in the income tax personal allowance of £120 a year for basic rate taxpayers.