In this Budget speech Philip Hammond announced that he would be raising both the personal allowance, and this higher rate tax threshold in April 2019, a year earlier than the Conservative party manifesto pledge.
But in the accompanying Budget documents it was revealed that the upper earnings limit for national insurance contributions will also be increased, in line with this tax threshold.
Royal London director of policy Steve Webb say this change will effectively “claw back half of the gains to millions of higher earners”.
In his speech, the Chancellor announced that the starting point for higher rate income tax would increase from £46,350 to £50,000. This will reduce the income tax rate on the slice of pay between £46,350 to £50,000 from 40 per cent to 20 per cent.
The Budget documents states: “The National Insurance contributions Upper Profits and Upper Earnings Limits are aligned to the higher rate threshold and will therefore also increase in 2019 to 2020”.
In other words those earning between £46,350 and £50,000 will now pay NICs at a rate of 12 per cent, rather than 2 per cent on this band of earnings. NICs are charged at a flat rate of 2 per cent above the upper earnings limit.
Royal London says the combined effect of these two changes is a reduction in the income tax rate by 20 per cent but an increase in the NIC rate by 10 per cent, meaning the net saving is only 10 per cent of this band of earnings.
Webb says: “The chancellor is well within his rights to increase the bands over which the full rate of NI Contributions is payable. But as this wipes out half of the gain for higher earners of raising the starting point for higher rate income tax, he should have come clean and mentioned this in the speech rather than leave it in the Budget small print.”