The Prime Minister ended the Conservative Party Conference with a pledge to increase the higher rate tax threshold – the starting level of income at which 40% tax is payable – to £50,000 “in the next Parliament”. At present, the threshold is £41,865 (made up of a £10,000 personal allowance plus a £31,865 basic rate band). Although it sounded generous, the reality was rather different:
- “In the next Parliament” could mean in 2020/21, as governments now have fixed five year terms and the next one does not start work until 2015/16.
- The 2015/16 threshold has already been set at £42,285 – a 1% increase over this year’s level.
- A rise from £42,285 in 2015/16 to £50,000 in 2020/21 would be equivalent to annual increases of 3.4%, which sounds rather less impressive, especially if you consider that 2% of that is the expected inflation rate.
- The threshold at the start of the current Parliament in 2010/11 was £43,875, unchanged from the previous tax year.
- Had the 2010/11 threshold figure been increased in line with inflation, as measured by the Consumer Price Index, it would be over £50,500 next tax year, as the graph below shows.
- For most earners the benefit of the increased threshold would be offset by a corresponding increase in the limit for full rate National Insurance Contributions (NICs), which currently matches the higher rate threshold. Thus, if you are an employee, you would save 20% in tax, but then pay an extra 10% in NICs.
As ever, waiting for politicians to reduce your tax bill will probably prove less reliable than making sure your own personal tax planning is up to scratch.