Falling into the higher rate tax trap
Figures from the Institute for Fiscal Studies (IFS) suggest that an additional 750,000 people will start to pay higher rate income tax at 40% from April 2011.
This contrasts with around 500,000 who will no longer be paying income tax from April onwards.
These changes are the result of the threshold for higher rate income tax being lowered at the start of the 2011/12 tax year.
The higher rate tax threshold will be coming down from £37,401 to £35,001 on 6th April 2011. At the same time, the personal allowance for people under age 65 will increase from £6,475 to £7,475.
Understanding the impact of tax changes looks set to be quite complex for 2011/12.
In addition to these threshold changes, there will be an increase in National Insurance and reduction in some benefits. Higher earners are also still having to contend with the removal of their personal allowance on earnings over £100,000 and paying 50% income tax on earnings over £150,000.
This is before they start to consider the impact of the next round of pension changes, which see the anti-forestalling measures replaced with a reduced annual allowance of £50,000.
Tax planning is an important part of Financial Planning and anyone who feels they might be worse off as a result of these tax changes in April should speak to their Financial Planner as soon as possible to update their plans as we enter the new tax year.