Budget 2009: personal tax – 50 per cent top rate on income tax

Future tax rises were always likely to be on the agenda as the Chancellor seeks to reassure the international money markets that he has plans laid to reduce the UK’s huge borrowing deficit.

Having already primed expectations of a new top rate of income tax of 45 per cent for those earning over £150,000 a year in last autumn’s pre-Budget report, he announced that the new rate would actually be 50 per cent and would come into effect next April, a year earlier than planned.

Also from April 2010, the basic personal allowance for income tax will be gradually reduced to nil for individuals with “adjusted net incomes” above £100,000.

There are changes, too, to the tax relief available to high earners on their pension contributions.

As from April 2011, pension contributions tax relief for those earning more than £150,000, which stood at 40 per cent, will be cut so that it gradually tapers to 20 per cent (for those on incomes of £180,000), the same as for basic rate taxpayers.

To prepare for the new regime, and to prevent higher earners from upping their pension contributions before the reduced relief comes into effect, a special annual allowance has been introduced as from 22 April 2009. The allowance is £20,000 and is the limit on the amount of additional pensions savings for which full tax relief at the higher rate of tax can be given. The special annual allowance charge will only apply to someone with an annual income of £150,000 or more in any tax year from 2007/08 who increases the level of their pension savings on or after 22 April 2009 beyond their normal pension savings.

As announced in the pre-Budget Report, the personal allowance – the point at which income tax becomes payable – for the under-65s increases to £6,475.

For people aged between 65-74 it is £9,490 and for those aged 75 and over it is £9,640.

Also as announced in the pre-Budget Report, the starting point for employers’, employees’ and self employed National Insurance Contributions goes up with inflation to £110. The upper earnings and profits limits for Class 1 and Class 4 NICs increase from £770 to £844 per week. For the self-employed, the rate of Class 2 contributions increase to £2.40 a week.

For gains on assets above the annual exempt amount, the capital gains tax charge stays at 18 per cent.

The annual limit for tax-free ISAs has been raised to £10,200, of which £5,100 can be saved in cash. The new ceiling applies this year to savers aged over 50 and to all savers next year, with the first deposits being available from 6 October 2009.

The stamp duty holiday for homes worth up to £175,000 is to be extended until 31 December 2009