PART I – THE MISSING WORDS ROUND
The Chancellor’s big surprise in the Budget was his decision to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 for 2019/20. Pre-Budget rumours that both thresholds would be frozen were confounded as Mr Hammond leap-frogged the 2017 Conservative manifesto promise to achieve these levels by 2020/21. As usual with Budget announcements, the detail is often in what was left unsaid. Mr Hammond’s generosity is less than it immediately seems because he will introduce a freeze on the personal allowance and higher rate threshold for 2020/21 before CPI indexation starts the following year. The consequences for those for those with income under £100,000 are not entirely straightforward in two areas – the net tax gain after national insurance contributions (NICs) are factored in, and for those caught by the high-income child benefit tax charge.
NICing back the increase
The Budget speech made much play of the higher rate threshold increase but failed to mention the knock-on effect on national insurance contributions (NICs) – a tax in all but name. Since 2009/10 the upper earnings limit (UEL) for NICs has been aligned with the higher rate threshold. Outside Scotland (which sets its own income tax rates and bands), this has the result of clawing back half of the tax savings from the higher rate threshold increase for an employee – the self-employed lose about a third because their main NIC rate is lower. The tax benefit of the personal allowance increase is unaffected, although it is worth noting that NICs will start to be paid at £8,632 of earnings in 2019/20, £3,868 before income tax begins to bite.
Catherine is an employee earning £50,000 a year. In 2019/20 her income tax bill will drop by £860 (£260 from the personal allowance change, £600 from the higher rate threshold increase). But her NICs bill will rise by £340, wiping out all of the benefits of the increased personal allowance and leaving her a net £520 better off.
What is ‘high income’?
The Budget also affects the high-income child benefit tax charge. Introduced in January 2013 when the higher rate threshold was £42,475, the charge was triggered once income exceeded £50,000. That trigger point, like many others in the tax system, is not subject to indexation and has remained unchanged ever since. In 2019/20, the result is that there is a cliff edge at £50,000 for anyone caught by the child benefit tax charge. So for our employee Catherine, on the £1 between £49,999 and £50,000, the rate of tax will be 20%, whereas the next £1 will suffer 40% tax (41% if she is a Scottish taxpayer at current rates) plus the child benefit tax charge (equivalent to another 17.9% for a two-child family) – nearly 58% (59% in Scotland) in total. Once she is over £60,000 of income, her effective marginal tax rate drops back to 40% (41%).
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