In the 2018 Budget, the Chancellor announced that the higher-rate income tax threshold is to increase from £46,350 to £50,000 in 2019/20.
What this would mean is that taxpayers earning between £46,350 and £50,000 will see their income tax rate reduced from 40% to 20%, providing what looks like a tax cut of 20%.
Individuals who were set to benefit from this however, will now only see half of the tax reduction expected, as a result of a Budget measure not mentioned in the Chancellor’s speech.
More detailed documentation published alongside the Budget says the upper profits and earnings limit for national insurance contributions (NICs) will increase at the same time that income tax rates are reduced.
This means that employees within this earnings bracket will see their NICs rise from 2% to 12%. In effect, taxpayers benefitting from a 20% reduction to their rate of income tax will see a 10% increase to NICs at the same time.
This change is not unusual however, as HMRC data shows the upper earnings limit and upper profits limit have been aligned to the higher-rate threshold since the 2009/10 tax year.
Steve Webb, director of policy at Royal London, commented:
“The Chancellor is well within his rights to increase the bands over which the full rate of NICs is payable. But 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.”
According to Steven Cameron, pensions director at Aegon, the change means an individual earning £50,000 or more will save £60.83 per month in income tax, but lose £30.41 of this in extra NICs.
Cameron also warned that the income tax cut could come with a “sting in the tail” for pension contributions, as those moving down to the basic-rate bracket will see a reduction in the Government top-up.
A higher-rate taxpayer receiving 40% tax relief on their pension contributions would see that decrease to 20% if they moved down to a basic-rate tax bracket.
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