Expert View: Tax changes to take many by surprise

MANY of us will be surprised at the prospect of joining the 40 per cent tax rate club in April in this age of pay cuts and austerity budgets. The reason for this lies in a series of changes to the tax system made over the past 12 months that combine to hit pockets on 6 April.

The main change is to the higher rate tax threshold. Although tax rates will remain the same, the income threshold will reduce so that more people will be taxed at 40 per cent. Those who are will pay 40 per cent tax on about 2,500 more of their income.

The rationale for the drop in the threshold is that the basic personal allowance (the first slice of income on which no tax is due) will increase from 6,475 to 7,475 from 6 April. Higher rate taxpayers are not intended to benefit from this increase so the higher rate tax band will reduce to compensate. When these changes are added to the 1 per cent increase in national insurance contributions from April, the overall effect is that those with income of more than about 33,000 will be worse off and those who earn less than 33,000 should be better off (and more so as income decreases).

Being in the higher rate tax bracket will also mean that, from April, entitlements to the family element (currently 545) of the child tax credit could be lost and working tax credits restricted or frozen.

Higher rate taxpayers can still reduce their tax bills by, for instance, increasing qualifying "gift aid" donations to charity or pension contributions. Both moves would extend the amount of income on which tax is paid at the basic rate. However, even pensions are not the perfect answer as annual contributions of more than 50,000 after 6 April could result in a tax charge at 40 or even 50 per cent for those paying the top rate of tax.

The financial impact will differ for every individual and family but very few middle and higher earners will be unaffected.

• Susannah Simpson is a personal finance specialist at PricewaterhouseCoopers