Pensions - Articles - Chancellor grabs half of gains to millions of higher earners

The Chancellor has been far less generous to millions of higher earners than appeared at first sight, according to detailed study of Budget papers by mutual insurer Royal London.

 In his speech, the Chancellor announced that the starting point for higher rate income tax would increase from £46,350 to £50,000.

 This will reduce the income tax rate on the slice of pay between £46,350 to £50,000 from 40% to 20%.

 But a detailed paper published alongside the Budget says that the upper earnings limit for national insurance contributions will be increased in line with the rise in the increase in the floor for higher rate tax:

 “The National Insurance contributions Upper Profits and Upper Earnings Limits are aligned to the higher rate threshold and will therefore also increase in 2019 to 2020”. 

 This means that instead of paying a NICs rate on 2% (currently payable on earnings above the upper earnings limit) workers will pay the full rate of 12% on this same slice of earnings, an increase of 10%.

 The combined effect of these two changes is a reduction in the income tax rate by 20% but an increase in the NIC rate by 10%, meaning the net saving is only 10% of this band of earnings.

 Commenting, Steve Webb, Director of Policy at Royal London said: “The Chancellor is well within his rights to increase the bands over which the full rate of NI Contributions is payable. But as this wipes out half of the gain for higher earners of raising the starting point for higher rate income tax, he should have come clean and mentioned this in the Budget speech rather than leave it in the Budget small print”.

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