Budget brings tax hike for 800,000 people

Updated: 


George Osborne


As ever with the Budget, it's not just what George Osborne said that will hit our pockets, but what he didn't. While he was sharing the great news of a raising of the personal tax allowance next year, he quietly failed to mention that in order to pay for this he was dragging hundreds of thousands more people into the higher-rate tax band.

So how will he do it, and will it make you any worse off?


Tax cut

The personal tax allowance will go up to £10,000 in 2014 - a year earlier than the government had promised. It means that since the Coalition came to power the allowance will have risen over £3,500. It's a huge boon for millions of hard-pressed families, and will save a typical family £700 a year in tax.

However, Budgets are all about shuffling money around, and in order to pay for this tax break, Osborne has been quietly shifting hundreds of thousands more people into paying higher rate tax.

More pay higher-rate tax

He has done this by decoupling the higher rate tax threshold from inflation. Instead of rising to keep pace with inflation, it will actually drop in April this year. Then the threshold will rise at 1% in April 2014 to £41,865 - and then another 1% in April 2015. As wages rise with inflation, more and more people will be dragged into this band.

The Institute of Fiscal Studies estimates that over the two-year period, 800,000 more people will pay higher-rate tax. It means that nowadays one in six people fall into this bracket. This compares to 1989 when just one in 20 people paid this rate of tax.

Will you pay more?

As a result, many people may well lose a good proportion of anything they save from the raising of the personal allowance. Patricia Mock, a tax director in the private client services practice at Deloitte, says that this April taxpayers should be better off because the increase in the personal tax allowance will offset the additional amounts they may pay in higher rate tax.

However, next year, while basic rate taxpayers will be up to £267 better off, higher-rate taxpayers will only be up to £62 better off. And some will be no better off at all.

She adds:"People with income over £120,000 will not benefit at all from the personal allowance increase. In 2013/14 these taxpayers will see a tax increase of £472, with a further increase of £29 in April 2014."

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