Five million higher earners will be hit by a £200 ‘stealth tax on Middle England’ because of changes to National Insurance Contributions buried in Treasury documents.
The Chancellor announced this week he would reward those on the 40p income tax by raising the tax threshold from £43,000 to £45,000, saving higher rate taxpayers £400 a year.
But he failed to mention he would also raise the national insurance threshold to the same level – a move which has the reverse effect.
It means that, while higher earners will pay £400 less in income tax next year, they will pay £200 more in national insurance. They will therefore save just half of the headline figure of £400.
Nearly five million middle class workers are set to be hit by a £200 a year stealth tax after the Chancellor Philip Hammond, pictured today with Theresa May, quietly hiked national insurance contributions for higher rate taxpayers
More than four million people now pay tax in the 40p band, more than double the number caught by the rate in 1990/91. Pictured: Blue bars show the number of workers in the 40p bracket and the red line shows how the threshold has changed
The move will net the Treasury an extra £1billion next year alone.
Critics have accused Philip Hammond of being ‘disingenuous’ and giving with one hand while taking with the other.
Previously, employees paid 12 per cent national insurance on earnings up to £43,000, and 2 per cent on anything above that. But from April, workers will pay 12 per cent on earnings up to £45,000 because the threshold has been raised meaning an extra 10 per cent tax on £2,000 of income above £43,000.
This will cost anyone currently earning over £43,000 an extra £200.
Mr Hammond failed to mention this in his autumn statement. Instead, the change was buried on page 42 of the statement’s policy costings, which is separate to the main document. In a single line, it says the national insurance upper limit will be ‘aligned with income tax higher rate threshold’.
John O’Connell, of the TaxPayers’ Alliance, said: ‘It is typical of politicians to give with one hand and take away with another. This is a classic example of how an insanely complicated, opaque tax code prevents the public from understanding policies which directly affect them.’
Tim Farron, leader of the Liberal Democrats, said: ‘This is a stealth tax on Middle England.
‘The Government talked about helping those who struggle with this Autumn Statement when actually what they have just done is slapped them in the face.’
During his statement on Wednesday, Mr Hammond said: ‘I said that the tax system must be fair and that means rewarding those who work hard by helping them to keep more of what they earn.’
He revealed that workers would not have to pay income tax until they earned more than £12,500 and would only pay the 40 per cent rate on earnings above £45,000.
Over the past decade, the personal allowance of tax free income (red line) has increased steadily, with some rapid rises under the coalition. But it was partly paid for by lowering the threshold for high rate tax (blue line). The Tories promised to reverse this with big increases to the higher rate threshold at last year’s election
WORKERS FACE A TAX BLOW IF THEY LATER TRY TO PAY MONEY BACK IN
Workers in their 50s and 60s who dip into their pensions face a tax blow if they later try to pay money back in.
The Government has moved to stop savers claiming two lots of pensions tax relief.
Usually workers can put up to £40,000 into a pension each year and claim back the income tax they paid on the money.
As soon as they dip into the pot after age 55, the savings allowance falls to £10,000.
But from next April that limit will be slashed to £4,000 to stop pensioners gaming the system.
The Government fears some over-55s are exploiting the rules by cashing their nest eggs and putting the money into a pension to receive double tax relief on their contributions.
However, experts warned that the changes would hurt workers who use the pension freedoms introduced last year.
If they breach the £4,000 limit they face a tax charge of 55 per cent on the excess, with bills ranging into thousands of pounds.
Former pensions minister Steve Webb, who now works at insurer Royal London, said: ‘Cutting this allowance flies in the face of efforts to make retirement more flexible.’
But the Chancellor made no mention of the parallel changes to national insurance contributions, nor did the main Autumn Statement document mention the increase.
Tina Riches, tax partner at Smith &Williamson, said: ‘I think it is disingenuous not to explain the implication of changing the national insurance band in line with income tax. This has happened for several years but is never spelled out by Government.’ The tax expert said the Government could have avoided the £200 national insurance bill by keeping the threshold on which workers pay 12 per cent at £43,000.
Alternatively, they could have raised it to £45,000, in line with income tax, but also raised the lower threshold at which people start paying national insurance from around £8,000 to £10,000. This would mean Britons would still be paying 12 per cent tax on the same amount of income.
Lindsey Jutten, at accountants PwC, said the raised national insurance threshold meant ‘the Chancellor is not fully passing on the income tax reductions to middle and higher rate earners’.
SAVERS FACE HAVING NEST EGGS EATEN UP BY COST OF LIVING
Savers who take out the Government’s new investment bonds face having their nest eggs eaten up by the cost of living, it has emerged.
Two million savers are expected to sign up to the 2.2 per cent three-year deal that was unveiled in the Autumn Statement.
But Office for Budget Responsibility figures show the National Savings & Investments bonds will fail to keep pace with inflation, which is expected to hit 2.5 per cent by 2018. As a result, savers’ cash will lose value in real terms over the three years.
Calculations by Money Mail reveal someone who pays the maximum £3,000 into the deals when they go on sale next year could be left £9 worse off by the end of the bond’s term.
Experts accused the Government of selling savers short. Sue Hannums, from campaign group Savings Champion, said: ‘The 2.2 per cent rate now looks like a futile gesture. The Government is well aware of how inflation is likely to perform over the next year.’
Justin Modray, from advice firm Candid Financial Advice, said: ‘This deal isn’t good enough if customers’ savings are being eroded. It is better than nothing but if inflation stays high this is not going to help savers a lot.’
National Insurance was originally a tax where contributors were entitled to more generous social security benefits depending on how much they put in. However, it is now acknowledged that money paid in simply funds general welfare and benefit spending.
There have been calls for many years to combine national insurance and income tax so that the total tax workers pay on their earnings is clear.
For example, a basic rate taxpayer would hand over 20 per cent income tax and 12 per cent national insurance, meaning their total earnings tax would be 32 per cent.
There are currently 4.7million higher rate taxpayers. A Treasury spokesman said: ‘A typical higher rate taxpayer will be £200 better off after these changes.
‘The higher rate threshold and NICs upper earnings limit have been aligned since 2009 – this keeps the tax system simpler.’ Scottish taxpayers could be dealt a double tax blow because its government has suggested it will only raise the 40 per cent income tax threshold to £43,430 next year, rather than £45,000.
This means higher-earners will only save £86 next year. They will then have to pay £200 more in national insurance, because they must adhere to UK thresholds on this. It means overall higher-rate taxpayers will be £114 worse off next year than they are currently and £314 worse off than other higher earners in the UK.
BRITAIN SET TO SPEND £40BILLION A YEAR SERVICING ITS SPIRALLING DEBT
Britain is to spend £40billion a year servicing its spiralling debt – more than the budget for defence and prisons combined.
Chancellor Philip Hammond was criticised yesterday over official forecasts showing the national debt is due to reach almost £2trillion.
The Institute for Fiscal Studies claimed the Chancellor was even more relaxed about spending taxpayers’ money than Ed Balls – who was ridiculed by the Tories before the last election for being spendthrift.
Mr Hammond denied that spending was ‘out of control’ and said he was committed to reducing the deficit every year.
But forecasts published in Wednesday’s Autumn Statement predicted the national debt will hit £1.95trillion by 2021.
And figures tucked away in the statement show the debt repayments will total £42.7billion by 2021/22. In 2019/20, the bill will stand at £39.3million – more than the £30 billion to be spent by the Ministry of Defence and the £5.7billion by the Ministry of Justice combined.
The country will not begin to pay down its debts until 2023 at the earliest.
The IFS said that, rather than balancing the books by 2020, Mr Hammond was ‘happy’ to keep borrowing two per cent of national income.
At the last election, Ed Balls committed Labour to reaching a surplus in 2018/19.
Thomas Pope, of the IFS, said: ‘It’s even weaker than what Labour were planning.’
The IFS also criticised the Tories for being worse than Labour at sticking to their own fiscal rules.