New UK Tax Cuts In Force

by Jason Gorringe, Tax-News.com, London

09 April 2009

The UK government has announced that a number of tax cuts announced by Chancellor Alistair Darling in last November's pre-budget report were implemented on April 6, the start of the new tax year.

Under the changes, the government has increased the personal allowance by GBP130 above indexation for 2009-10. This is on top of the GBP600 increase announced in May for 2008-09, which has now been made permanent. Together the changes mean that 22 million basic rate taxpayers under 65 will pay GBP145 less tax in real terms in 2009-10.

There has also been an increase in the starting point for the higher 40% rate of tax, although, as Leonie Kerswill, tax partner at PricewaterhouseCoopers points out, it's not all good news.

"Higher earners will see national insurance bills rise and they will lose a good deal of what they gained on the income tax swing, through the national insurance roundabout," she said.

Those on average earnings will see their national insurance contributions (NICs) reduce slightly, thanks to a modest increase in the start point for paying NICs. The clawback for the higher paid is due to the considerable increase in the 'upper earnings threshold', the point where the 11% rate of NICs stops. This is, from April 6, aligned with the starting point of the 40% income tax rate.

For some, the tax cut will be temporary. Those on higher incomes will experience an increase in taxation from April, 2010 when a new 45% top rate of tax on incomes of more than GBP150,000 is introduced. At the same time, those with incomes over GBP100,000 will see their personal income tax allowances restricted. The employee, employer and self-employed rates of national insurance contributions will increase for all taxpayers by 0.5% from April 2011. However, Darling claimed at the time of the pre-budget report that the combined effect of these reforms will mean that taxpayers with incomes below GBP40,000 will pay less tax and national insurance contributions in April 2011 compared to April 2008.

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