Budget will create more higher-rate taxpayers

Tax folder

Despite making no changes to income tax levels, the 2010 Budget will create tens of thousands of new higher-rate taxpayers, experts have warned.
In what was the government’s last Budget before the general election, Alistair Darling announced that all income tax bands and personal allowances (the amount you can earn before tax kicks in) will be frozen for the next financial year.

However, David Kilshaw, head of private client advisory at KPMG, warns the move will “hurt everybody” as pay inflation will push more people into high tax bands.

Tony Bernstein, senior tax partner at HW Fisher Chartered Accountants, explains: "Tens of thousands of taxpayers are going to be brought into the higher-rate tax band on the back of this Budget.

“The chancellor expects inflation to be 3% in the coming year but the personal allowance and basic rate band remain frozen, something that was conspicuously absent from the speech.

"This bad news of freezing the allowances and the higher rate threshold, which will affect all earners, was not mentioned at all.

“Instead, and wary of alienating the electorate, the chancellor focused on the areas that affect the relatively few higher earners, such as the 50% tax rate.”

Darling also confirmed in the Budget that the new 50% rate of income tax on people earning more than £150,000 a year – the top 1% of earners – will come into place in April. For people with incomes over £100,000 a year - the top 2% - the government will gradually remove the value of their personal allowances.

Karen Barrett, chief executive of unbiased.co.uk, says freezing personal allowances for all taxpayers is a “stealth tax”.

Personal allowances were last frozen over a decade ago. “This ‘stealth tax’ follows the new 50% higher rate of income tax, which is set to come into force next month for those earning more than £150,000,” Barrett adds.

“It is clear that consumers are going to be hard hit by these moves, but everyone needs to take action to ensure they are not giving more than they should to the taxman.”