Budget predictions suggest high earners will be hit by increases in income tax

The forthcoming budget due to be announced on 22 April is likely to affect higher earners who could be hit by significant increases in income tax according to tax specialists Smith & Williamson.

Richard Mannion, national tax director at Smith & Williamson, said higher rate taxpayers, who will already be paying more national insurance contributions (NIC) from 6 April when the upper earnings limit will be aligned with the higher rate threshold for income tax, can expect further rate increases after the budget.

“The chancellor will need further funds. He may look to generate additional revenue by increasing the rate of income tax for higher rate taxpayers, as early as this year. We know that higher rate tax rises to 45% in April 2011, but this debate could easily be brought forward. Ireland, for example, has introduced a temporary levy for higher rate taxpayers. The UK government could choose to follow this approach.”

Smith & Williamson also expects that capital gains tax rates could be increased from its current flat rate of 18% to an individual’s marginal rate of tax. It said this would stop any perceived tax avoidance strategies which attempt to classify income as capital gains. Collections to the Exchequer arising from capital gains tax were around £5.3billion in 2007/08 and an increase on rate may be required to maintain this level.

Thresholds for personal allowances and income rates may also be frozen due to low inflation. However, the large government economic stimulus packages for the banking and car industries and an injection of cash in the economy through government purchase of bonds may trigger higher levels of inflation.

Personal allowance for employees earning more than £100,000 will be reduced, thereby increasing the government’s tax-take and Smith & Williamson believe that it is possible this measure could be advanced.

It is also thought that the government might generate revenue by accelerating national insurance increases, which were announced in the last year’s pre-budget report. According to Smith & Williamson, increasing NICs for employers effectively acts as a tax on jobs, which would be counterproductive in the current environment. NIC could therefore be increased for individual employees.

It is also thought the Chancellor might increase the £30,000 limit on shares that can be held in a company share option plan (CSOP). Under a share incentive plan (SIP) the maximum tax breaks are only achieved if the shares are held in trust for five years. This period could be reduced to increase participation among lower earners.

Inez Anderson, employment tax and incentives director at Smith and Williamson, said the government may push its environmentally driven tax regime further in this year’s budget. For example, greater tax breaks may be introduced to encourage employers to use greener vehicles in their company car schemes.