Increases will wipe out 2p reduction in income tax

Increases will wipe out 2p reduction in income tax

Middle-income Britain's April salary slips will feature an unwelcome increase in national insurance. The extra charge will wipe out many of the gains made from the headline cut in the basic rate of income tax.

Whereas those earning between £18,000 and £35,000 will be better off as a result of the lower basic rate, little-publicised changes to national insurance mean those earning more will lose out.

In the new tax year, salary earners will pay national insurance on the first £770 a week (£40,040 a year) of earnings. For the present tax year this upper earnings limit is £670 a week or £34,840 a year. Accountant Maggie Gonzalez at BDO Stoy Hayward calculates that after the reduction in the basic tax rate, someone earning £40,000 a year will be £92 a year worse off thanks to the national insurance increases.

And in 2009-10, there will be further national insurance increases when the upper earnings limit rises into line with the start of the 40% top tax rate band - £41,435 in the coming tax year.

But the income tax cut to 20% also produces losers at the lower end of the earnings spectrum. They suffer because of the abolition of the 10% tax rate - introduced by Gordon Brown in 1999 - for all but savings accounts.

"You have to balance the gains taxpayers make from the reduction from 22% to 20% against the loss of the 10% band," says income tax expert John Whiting at accountants PricewaterhouseCoopers......continued below

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"In round-figure terms, anyone earning under £18,000 a year loses out but the losses are most pronounced around £8,000 to £10,000."

He calculates that someone under 65 on £10,000 will lose about £2 a week from the abolition of the 10% rate band. Those losing out could also include many who have taken early retirement, as well as students paying their way through college who cannot claim working tax credit.

Most of those over 65 will gain from the new tax rates. The difference is that the personal allowance - the slice of income you can earn before paying tax - goes up substantially for over-65s, more than compensating for the loss of the 10% band.

The personal allowance for all but the very richest pensioners goes up by £1,480 (£1,490 for the over-75s) to £9,030 (£9,180 for the over-75s). The under-65s see their allowance rise only by £210 to £5,435.

"On this basis, a pensioner on £10,000 is about £1.50 a week better off," says Whiting.

guardian.co.uk © Guardian Newspapers Limited 2008