Tales of the Unexpected...
The PBR was a mix of the widely expected and the enormously surprising from a personal tax perspective this year.
We already knew (because the Treasury started briefing journalists last night, in a complete break with tradition) that the temporary uplift to personal allowances, designed to compensate lower and middle earners for the withdrawal of the 10% tax rate, would be made permanent. It's also been uplifted to £145 (from £120) from 1 April 2009.
We also knew that the highest 1% of earners - those earning more than £150,000 - will find themselves subject to a new 45% tax rate from 2011.
We weren't expecting the changes to NIC. From 2011, the rate for both employer's and employees' NIC will increase by ½%. As a sweetener, the lower earnings limit for NIC will be brought into line with the income tax personal allowance threshold. Our back of the envelope calculation shows that someone earning £40k will be £100 per year worse off.
But a bitter pill is the alignment of the upper earnings limit and the higher rate tax band with effect from April 2009. People earning around £44k will find themselves £32 per month worse off.
As an aside, the cost to employers will be c.£2 billion per annum.
Most surprising of all was the news that from April 2010 people earning between £100k-£140k per annum will lose part of the benefit of the income tax personal allowance, an allowance previously enshrined as sacrosanct for all taxpayers. 649,000 people fell into that bracket in 2008-09. The Chancellor announced that such earners will only receive the same net benefit from their personal allowance as basic rate taxpayers - which will take around £100 per month out of their pockets. And it's worse news for people earning more than £140k per annum will get no personal allowance at all - at a cost to them of £200 per month.
One additional twist is that the personal allowance tapers off at £100k and £140k - you lose £1 of personal allowance for every £2 you earn. That means that the effective tax rate for people within the two taper regions is a whopping 60%.
By the way, that means that by 2011 we'll have 6 different income tax rates to juggle with, plus tapering allowances. That's quite an increase in complexity for anyone who operates a payroll.
Overall, it's clear that higher earners will see an increased tax burden due to the new upper tax rate and decreased personal allowances, but so too will middle earners owing to the NIC changes.