The Salary Calculator

Pre-budget report

Earlier this week the Chancellor of the Exchequer gave his pre-budget report, which gives us a preview of what he will announce in next year’s budget. For personal income, there were a couple of things to note. Firstly, the personal allowance (the amount that everyone can earn without paying income tax) is not increasing as it normally does in April 2010, and nor are the thresholds for National Insurance contributions. The Chancellor says that this is because the Retail Price Index (RPI) shows that deflation over the past 12 months means that in real terms we will be better off than a year ago even without the usual increase.

As already announced, there will be a new higher tax rate of 50% for income over £150,000, and personal allowances will be reduced gradually to zero for those earning over £100,000 (by £1 for every £2 earned over this limit).

The Salary Calculator will be updated with these details early in 2010, but as you can see, only those earning over £100,000 will find their take-home pay changing in April 2010. Everyone else will have the same personal allowances and the same tax and NI rates, so take-home will remain as before.

However, there was also news in this pre-budget report that there are plans to increase National Insurance contributions by 0.5% from April 2011, but also to raise the NI threshold so that those on lower salaries are not negatively affected. The details are not yet clear (and of course, there is an election between now and then so it may not come to pass) but whatever the changes for 2011 turn out to be, The Salary Calculator will be updated at that time.

Tags: 50% tax, April 2010, election, income tax, Pay As You Earn, personal allowance, tax rates, The Salary Calculator

Liberal Democrats pledge to lower income tax

A reader has asked me about this campaign pledge from the Lib Dems, where they say they will increase the income tax personal allowance to £10,000 if they win the next election. They say this could mean an extra £700 a year for low- and middle-income voters.

Let’s look at the numbers and see if they are right. As you can see on The Salary Calculator “about” page, the current allowance is £6,475 for under-65s. Increasing this to £10k would give everyone an extra £3,525 untaxed, and for those in the 20% tax band this would be £705, matching what the Lib Dems claim.

However, they have to raise this extra money from somewhere – as you can see on their website they have listed some areas they might take the money from, including taking National Insurance on benefits in kind and second jobs. Also, they may lower the threshold between the 20% and 40% rates, meaning smaller savings for those in the higher bracket.

At first glance, those in the 40% tax bracket will save even more with this increase in personal allowance (up to £1,410!), but if the threshold were lowered this effect would be smaller, and as you can see on the Lib Dem website, they also talk about modifying tax relief so that pension contributions are only tax free on the 20% rate. As always, the devil is in the detail!

Needless to say, should they come to power The Salary Calculator will be updated when they make good on this campaign promise.

Tags: April 2010, election, income tax, Liberal Democrats, Pay As You Earn, pension, Pensions, personal allowance, tax rates, The Salary Calculator