Tax grab will push 400,000 mid-income earners into top band

Cuts in pension relief could hurt teachers and civil servants, while rise in income thresholds will also hit better off

 George Osborne gave with one hand – a surprise £1bn tax giveaway for working people, with an increase in the amount they can earn before paying income tax – but took with the other, as he revealed a £1bn tax grab from middle-earners, which will see 400,000 more people dragged into the 40% tax band.

Widely trailed changes to tax relief on pensions were tougher than expected, with the cap on tax-free contributions falling from £50,000 to £40,000. That reduction, combined with a cut in the "lifetime allowance" for pension savings from £1.5m to £1.25m, will earn the Treasury an extra £1bn.

The chancellor said the measures will affect just one in a hundred savers, but it provoked a furious backlash from the pension industry, which claimed the move would further alienate people from saving for retirement.

The changes to income tax will benefit more than 24 million people, the Treasury said. The personal allowance (that bit of your income on which you pay no tax) was due to rise to £8,105 in the current tax year and to £9,205 in 2013-14, but Osborne said it would now increase by £1,335 in April – £235 more than previously announced. That translates into a £47-a-year tax cut for working people.

Osborne said of the increase: "This is a direct boost to the incomes of people working hard to provide for their families. That's £47 extra in cash next year. We are within touching distance of the £10,000 personal allowance."

But the point at which individuals start paying tax at 40% will fall from £42,475 to £41,451, and then rise by just 1% a year thereafter. As a result, many more people will start paying higher-rate tax, with the government admitting that 400,000 more individuals will be thrown into the higher tax bracket by 2015/16.

The Taxpayers' Alliance, a rightwing lobby group, said: "The chancellor has sent out entirely the wrong message to those earning or hoping to earn the increasingly modest wage where almost half of your income starts to be taken in income tax and national insurance.

"Hundreds of thousands of new people are being ensnared by a punitive rate of tax."

The chancellor also said he is pressing ahead with the cut in the highest rate of tax to 45% from April next year, claiming that the 50% rate, rather than increasing total tax revenue, actually reduced it. "HMRC data reveals that in the first year of the 50% tax rate, tax revenues from the rich fell by £7bn and the number of people declaring incomes over £1m fell by a half. A tax raid on the rich that raises almost no money is a con."

But at the other end of the income scale, millions of working households will be hit by a real-terms cut in tax credits and child benefit. Osborne said most working-age benefit and tax credit increases would be pegged at 1% for the next three years, and previously planned freezes would go ahead.

Child benefit payments will also face further cuts. In a month's time, 1.2 million families with a higher earner will start losing some or all of their child benefit. Osborne had already announced that child benefit rates would be frozen for three years until April 2014, and on Wednesday said that after that, increases will only be 1% a year for the following two years, saving the public finances £175m, rising to £330m by 2017/18.

The government billed the changes to pension taxation as a measure that will only affect a tiny number of wealthy savers. Under the new rules, any payments into a pension scheme above £40,000 will in effect be hit with a charge set at the individual's marginal tax rate.

For someone earning more than £150,000 in the 2013/14 tax year, when the top rate of tax will be 45%, the cost of contributing £50,000 into a pension scheme will rise by £4,500.

But pension experts warn that the changes could also hit teachers, doctors and civil servants, who have a good final salary-based pension scheme.

According to figures prepared by Hargreaves Lansdown, someone earning £55,000 a year could face a tax charge of as much as £13,000 in 2013-14 as a result of the pension cap, although they can take advantage of unused pension allowances to minimise the charge.

The impact will be felt most by someone with a long service record who receives a pay rise towards the end of their career, which can have a significant impact on the final value of their pension.

Meanwhile, savers hoping for a big increase in tax-free Isa limits had their hopes dashed. In the face of collapsing interest rates paid to savers – thanks in part to the government's Funding for Lending scheme – pensioner and other groups had called on Osborne to raise significantly the amount savers can put in tax-free Isas. This would have helped to offset the impact of record low rates.

Instead, he raised the overall Isa contribution limit by less than inflation, to £11,520. The new limit, up from £11,280, comes into force next April. Half the new limit, £5,760, can be placed into a cash Isa. Last April the Isa limit rose by £600.

Osborne also said the government is consulting over whether to allow direct investment via an Isa into smaller and start-up firms, listed on the Alternative Investment Market, a move he said would boost enterprise.

Article source :http://www.guardian.co.uk

George Osborne: "This is a direct boost to incomes … we are within touching distance of the £10,000 personal allowance

Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike for more info visit our site Azure Global and join us On Facebook