April 2010

Liberal Democrats pledge to lower income tax

by Admin

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.

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Monday, September 28th, 2009 Income Tax, Pay As You Earn 5 Comments

None of the content on this website, including blog posts, comments, or responses to user comments, is offered as financial advice. Figures used are for illustrative purposes only.

New, higher tax rate

by Admin

From April 2010, new tax rates will take effect. Most of us won’t be affected by the changes, as they only affect those with annual income in excess of £100,000.

The first change is the creation of a new income tax band for taxable income above £150,000, which will be taxed at a rate of 50%. This will make a significant difference to anyone who does earn this much as they currently are paying only 40% on this income.

The second change is a reduction of the personal allowance of £1 for every £2 your income is over £100,000. Your personal allowance is the amount you are allowed to earn without paying tax – by reducing this allowance the government are able to take more tax off your hands. In fact, I have calculated that whereas currently for every extra £2 you earn over £100,000 you take home £1.20, those of you lucky enough to be in this pay bracket will be taking home only £0.80 of that £2 from April 2010.

The Salary Calculator will be updated with these new rates early in 2010 when the details of personal allowances and other thresholds for that tax year are made available.

More details are available on the HMRC website here (PDF).

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Sunday, June 14th, 2009 Income Tax, Pay As You Earn 1 Comment
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