Higher income households: No escape for the rich from Conservative cuts
Published 23/06/2010 | 02:52
Having been the target of the final two Labour budgets, many higher earners may be dismayed to be back in the sights, particularly of a Conservative Chancellor. But those on above-average incomes will nevertheless be counting the cost of Budget day.
Although income tax rates have stayed the same, potentially hundreds of thousands of people who would not consider themselves high earners will find that before too long they will be paying 40 per cent tax.
This is because the Chancellor has decided to freeze the higher-rate threshold, so that taxable earnings between £37,401 and £150,000 will be taxed at 40 per cent until April 2014 at least.
The migration of large numbers of people from the basic to the higher rate of income tax, known as "fiscal drag", will hit households in London and the south-east the hardest as they generally have higher earnings than the rest of the UK.
More modest higher earners may also be caught by the Chancellor's decision to phase out tax credit payments for those earning more than £40,000 a year. And for very high earners the headlines are even less cheery as the new additional tax rate of 50 per cent on earnings over £150,000, introduced in April, will continue regardless of the change in government.
However, critics of the last government's decision to reduce tax relief on the pensions contributions of those earning more than £150,000 will be pleased that Mr Osborne now plans to review whether the £3bn a year to be raised can be found through an alternative scheme, such as capping the amount of money that can be paid into a pension each year.
"Replacing the previous government's complex proposals with an elegant solution that achieves the same revenue objective is a move in the right direction," said Trevor Matthews, chief executive of Friends Provident. "I am hopeful this will bring an end to the tinkering with tax relief on pension saving and now we can look forward to a more simplified and stable approach."
However, Andrew Cawley, from accountancy firm KPMG, said that the potential backtracking on reducing tax relief for those earning more than £150,000 could mean that many more higher-rate taxpayers will eventually be affected. "Rather than the previous approach of reducing tax relief solely for those on salaries of £150,000 and above, the Government intends to consult on an annual allowance for higher-rate pension tax relief, of between £30,000 to £45,000," he warned.
"This will bring many more higher-rate tax payers into the net – rather than affecting 2 per cent of pension savers, it could now impact many more higher-rate taxpayers, around 10 per cent of all savers."
Other tax changes that will predominantly hit higher earners include the rise in capital gains tax from 18 to 28 per cent, though Mr Osborne resisted calls for an increase to 40 per cent.
The fact that the Chancellor chose not to raise CGT to 40 per cent means that some high earners may still be tempted to disguise their income as a capital gain rather than pay 40 or 50 per cent income tax. Mr Osborne said he nevertheless expected the CGT increase to bring an extra £1bn into Treasury coffers as fewer people than now would use the capital gain ploy to avoid paying higher-rate income tax.
Analysts dismissed fears that a CGT rise would cause a fire sale of second homes as buy-to-let investors piled for the exit.
"This move is not likely to have a negative impact on the property market as buy-to-let investors are unlikely to sell off their buy-to-let properties," said Stuart Law, chief executive of property investment company Assetz.
"Professional property investors are generally looking at the long-term benefits and see the importance of the regular income rather than short-term capital gains."