Extra tax for highest earners
High flying City executives and other high earners on more than £150,000 a year were dealt a blow in the Budget with the top rate of income tax set to rise to 50% from next April.
Chancellor Alistair Darling announced that the planned 45% top rate of income tax will now apply from April 2010 rather than 2011, and it will also increase to 50%.
Plus, people earning more than £150,000 will no longer receive tax relief on pension contributions.
Darling says the increase to the top rate of tax, which will affect the richest 1% of people in the UK, will “pay for additional support for people now".
Meanwhile, from next April, the income tax personal allowance for people earning over £100,000 will be reduced at a rate of £1 for every £2 earned over £100,000 until it is completely withdrawn. This replaces the two-stage withdrawal announced at the 2008 pre-Budget Report.
Deloitte calculates the move will cost around 700,000 people around £220 each per month.
PricewaterhouseCooper says the new 50% top rate tax rate moves the UK from 13th to 18th place among the G20 economies in terms of income tax and social security rates for senior executives.
In the small print of the Budget, the government also announced that dividend income for the highest earners will be taxed at 42.5%. The tax rate on all income in trusts will also rise to 50%.
Alex Henderson, tax partner at PricewaterhouseCooper says: "This will further undermine the position of those who wish to use trusts to benefit their families."
The tax changes will raise an estimated £6 billion for the government from 2012.
However, think tank the Institute for Fiscal Studies has already warned that increasing the top rate of tax will not help the government raise enough cash to fund its massive borrowing.
It claims that rich people will simply leave the UK or use accounting rules to avoid paying income tax on more of their wealth.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.