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Why Budget tax allowance change isn’t as generous as it appears

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Written by: Paloma Kubiak
31/10/2018
Higher earners were given a seemingly generous tax break as part of this week’s Budget announcements. But buried in the small print were details of national insurance rises which wipe out much of the gains.

Chancellor Philip Hammond this week announced that the higher rate tax threshold – the point at which you start paying 40% income tax – will increase from £46,350 to £50,000 from April 2019, one year earlier than expected.

This move puts more cash into the pockets of workers as they pay basic 20% tax on more of their earnings. Calculations from Tilney show that someone currently earning £50,000 pays total income tax of £8,360. After the personal allowance increase next year, they will pay £7,500 so a saving of £860.

But, accompanying Budget documents reveal this same cohort will be subject to higher National Insurance Contributions (NICs), wiping out nearly half the gains from the threshold rise.

Currently, anyone earning up to £46,350 pays 12% NICs and 2% on anything above this.

However, as the higher rate NIC threshold is also rising to £50,000, the 12% NICs will also be applied up until this amount. So the usual 2% NIC rate for earnings over £46,350 will no long apply; higher rate taxpayers will have to pay 10% more on NICs.

As a result, the £860 annual tax saving is slashed as the NICs liability has increased by £333.84, meaning the net benefit stands at £526.16 instead.

Gary Smith, chartered financial planner at Tilney, said: “The main headlines following the Budget were obviously focused on income tax and how much better off higher earners would be in the next tax year. However, the subsequent increases to NI that have been announced will soak up a lot of the headline tax benefit.

“While it still stands that most will be better off following the changes to income tax, the public should be aware that the bonuses will not be as big as promised when all the other changes have been taken into account. It is important to speak to your financial adviser to ensure you have all the necessary details before making any key financial decisions for the new tax year.”

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