Jeff Salway: High earners will feel like they've taken a pummelling

New personal tax measures were thin on the ground this week, with confirmation that personal allowances will be frozen at their current level and that restrictions on pensions tax relief for high earners will go ahead as planned next year. The personal allowance for 2010-11 will be frozen at 6,475 for under-65s; 9,490 for those between 65 and 74; and 9,640 for those aged 75+, as announced in December.

David Kilshaw of KPMG described the allowance freeze as a stealth tax. "Everybody will hurt from the freezing of their allowances. And the widely held feeling that more tax rises are in the post-election pipeline means that it will only get colder."

There was also confirmation of the new 50 per cent income tax band for those earning over 150,000 a year from 6 April, when income tax allowances will be phased out for those earning over 100,000 a year, disappearing at almost 113,000.

National insurance contributions (NICs) will rise next April, as announced in last April's Budget. All employed and self-employed workers will be worse off due to an increase in NICs that will reduce the pay packet of the average employee earning 25,000 by some 200. The class 1 NIC rate will increase from 11 to 12 per cent, with the additional rate of NIC on earnings over the upper limit doubling to 2 per cent and the class 4 rate for the self-employed up from 8 to 9 per cent.

The fresh blows for wealthier Scots came with in the increase in stamp duty for properties worth over 1 million from 4 to 5 per cent, while the inheritance tax (IHT) threshold will now remain at 325,000 until 2014-15 after the Chancellor added four years to the one-year freeze announced in December.

Valerie Smart, tax director at PricewaterhouseCoopers (PwC) in Scotland, commented: "The IHT threshold being frozen is effectively a reduction in the IHT nil rate band in the order of 2.5 per cent, based on inflation targets. More tax payers will be brought into the IHT net – it is likely to impact particularly on individuals whose main asset is their home."

If high earners have lost out in the post-crunch tax tinkering, it is less obvious who the winners are. This week first-time buyers received a welcome boost, as did savers (with the inflation linking of the annual Isa allowance), entrepreneurs, some pensioners and young families. The giveaways were modest though. For instance, doubling the threshold at which 1 per cent stamp duty is payable to 250,000 will not help those with insufficient finance to secure a mortgage deal, with lending criteria still restricted.

The Budget documents also made it clear that not only do home movers not benefit from the higher threshold, but where couples are buying it is only applicable if both are first-time buyers.

So how does it all pan out for you? With the help of PwC we've created a few sample scenarios to illustrate how individuals and families will be affected by the latest measures.

Single person on 20,000

There will be no change to the take home pay for the average single person earning 20,000 in the coming year, with 15,724 left over after tax. But the 1 per cent increase on NICs from next April will leave them 74.45 worse off.

High earner (180,000 or above) with two children

The 50 per cent income tax rate comes into effect from 6 April 2010 for all income over 150,000 and personal allowances are reduced to nil at this level of income. The net increase in tax in this example is 4.87 per cent, with the net income reducing by 5,564 to 108,674 from 2010-11, after increased child benefits are factored in. They may also lose out when restrictions on pensions tax relief for high earners come into force next April.

Wealthy family, one child

Those earning approximately 120,000 will be affected by phased withdrawal of the personal tax allowance next month. Whilst the income is not subject to the new 50 per cent rate of tax, it is subject to a withdrawal of the personal allowance of 1 for every 2 of income over 100,000. So once an individual earns approximately 112,950 the personal allowance is withdrawn completely and they will suffer an effective tax rate on this extra 12,950 of up to 60 per cent. The decrease in net income after increased child benefit is accounted for is 2,574, leaving net income of 74,977, a 3.3 per cent decrease on 2009-10, PwC found.

Family with two children, earning a total of 50,000

This family benefits from a child benefit increase of 30p for the first child and 20p for each additional child, announced in December's pre-Budget report. There have also been small rises to the elements of the child tax and working tax credit, which will benefit lower earners. In this case the couple earning 50,000 are only entitled to the family element of the child tax credit of 545.

Retired couple with 10,000 private pension income and 3,000 savings

The tax position has marginally improved for low-income pensioners after a rise in the guaranteed element of pension credit taking total pension credits up from 1,532.96 to 1,618.24 for this couple. The Chancellor also extended payment of an extra winter fuel allowance in 2010-11, with an extra 100 for households with someone aged over 80, or 50 for those with someone over the female state pension age. As announced in the Pre-Budget Report the state pension will rise by 2.5 per cent, less than February's 3 per cent inflation rate. Unusually, the increase will not cover Serps, deferred pensions, the state second pension or graduated pensions.