Not good for those paying 40% income tax - £42,375

mitchaa

The band is to be reduced to £34,900 from £37,400. A whopping £2,500 reduction which in effect puts you into higher rate tax at earnings of just £42,375 from next year. A further 700k people will be brought into this bracket by next year with an expected 4m people overall paying higher rate tax by 2014.

http://www.dailymail.co.uk/news/article-1288797/BUDGET-2010-700-000-caught-higher-tax-trap.html

As well as our income tax bills rising substantially, we are double hit with the increase in national insurance which is to rise to 12% and 2%.

My maths makes that...

20% of £2500 = £500pa

I believe NI is to increase at earnings over £20k so someone earning £42,375 will fork out a further £223pa in NI.

Then VAT on top, cost of getting to work etc and if you were claiming any tax credits you will lose those too. Some people on modest salaries are in for a big shock come April next year:eek:

princeofpounds

This will be partially offset by the raising of the tax-free limit. A wonderful idea - no point taxing people who you are only have to give money back to through an expensive state apparatus! Should have gone further.

tomterm8

It trully shows, the conservative party are the party of high tax.

(More seriously, what they're taking away, they are also giving... these changes largely counteract the increasing of the personal allowance at the bottom end... )

michaels

Doesn't quite add up does it - for a higher rate tax payer an extra 1000 allowance is worth 400 quid but a 2.5k reduction in the 20% band will cost 500 quid - I thought the change was supposed to be neutral to higher rate tax payers?

The whole NI charade is ridiculous - with no upper limit now on any increases why not just combine tax and NI and simplify the rates - would also avoid the self employed hiding income as profits to avoid NI.

michaels

Especially on higher incomes - no one else find it strange that the (self proclaimed) 'party of the people' are criticising the 'party of the toffs' for making the tax system more progressive?!

tomterm8 wrote: »

It trully shows, the conservative party are the party of high tax.

mitchaa

Apologies, it appears I'm getting my knickers in a twist about nothing here. My maths appear to be flawed:o

Let's take someone on a £55k salary....

In 2010/11...

£6,475 free
£37,400 @ 20% = £7,480
£11,125 @ 40% = £4,450
Income tax bill = £11,930

In 2011/12...

£7,475 free
£34,900 @ 20% = £6,980
£12,625 @ 40% = £5,050
Income tax bill = £12,030

National insurance wise however..

£42,375 - £20k = £22,375 @ 1% = £223.75
£12,625 @ 1% = £126.25
Total = £350

(National insurance increasing to 12% after £20k and 2% at £42,375)

Add that to the £100 income tax bill and that is £450pa or £37.50pm down.

mitchaa

Can someone help on my maths please...

You can clearly see 20% of £2500 is £500. Why, when calculating the figures above then am I only coming up with a £100 difference?

Where is the other £400 going?

I'm seriously having another blonde moment.

michaels

You gain an extra 1k tax free (personal allowance) so saving 1000 * 40% = £400
You lose by paying 40% instead of 20% on an extra 2.5k (reduction in 20% band) = £500

mitchaa

michaels wrote: »

You gain an extra 1k tax free (personal allowance) so saving 1000 * 40% = £400
You lose by paying 40% instead of 20% on an extra 2.5k (reduction in 20% band) = £500

Bingo:D

I think it's the heat, my maths is normally spot on.

Thanks

mitchaa

michaels wrote: »

Doesn't quite add up does it - for a higher rate tax payer an extra 1000 allowance is worth 400 quid but a 2.5k reduction in the 20% band will cost 500 quid - I thought the change was supposed to be neutral to higher rate tax payers?

The whole NI charade is ridiculous - with no upper limit now on any increases why not just combine tax and NI and simplify the rates - would also avoid the self employed hiding income as profits to avoid NI.

I thought that too.

I.e... We were all going to benefit from the personal allowance increase but the increase in NI was going to eat that increase up where at the point of higher rate tax, the cost was neutral.

Now it appears, that the cost is not neutral. If you earn £42,375 where the thresholds are going to be aligned you are going to be paying an extra £323.75 in taxation. (£100 IT and £223.75 NIC)

Robbing barstewards kept that 1 quiet.

IveSeenTheLight

mitchaa wrote: »

I thought that too.

I.e... We were all going to benefit from the personal allowance increase but the increase in NI was going to eat that increase up where at the point of higher rate tax, the cost was neutral.

Now it appears, that the cost is not neutral. If you earn £42,375 where the thresholds are going to be aligned you are going to be paying an extra £323.75 in taxation. (£100 IT and £223.75 NIC)

Robbing barstewards kept that 1 quiet.

Mitchaa, you just need to negotiate a higher pay setllement for the year.
That's what I am doing.
Your £323.75 pa increase in tax would be countered by a £809.37 pay increase on £42,375. That's just under a 2% pay rise