Budget bombshells

The pre-Budget report delivered by Alistair Darling last December proposed little in the way of tax changes. The state of the public finances allowed for no generosity, while the election cycle meant only a few tax rises were announced.

As in the summer's Budget, it is the 'anti-forestalling' pension contribution changes that will bite straightaway for many partners, who will also find aspects of the detail particularly iniquitous. However, before looking at these, let's just recap on the basic personal tax changes that are likely to impact upon most partners.

Firstly, partners will lose the tax benefit of their ‘personal allowance' from 6 April 2010 on a tapering basis once they earn £100,000 pa - or more particularly, once their 'adjusted net income' exceeds £100,000 (okay, you do want to know?!) In broad essence their taxable income after taking account of losses, pension contributions and Gift Aid payments.

The personal allowance tapering ends at adjusted net income of £112,950. Income in this £12,950 range thus suffers the tax effect of the loss of the personal allowance on top of the 41% tax/NIC rate. This produces an effective marginal rate of tax on this slice of income of 61%, a rate not seen for over 20 years.

The bigger headline-grabber has been the introduction of a 50% higher rate of tax for those earning over £150,000. This is the second major change and will impact upon relevant partners from 6 April 2010 as well. For a year this means that the marginal rate of tax on earnings above £150,000 will be 51% once you take National Insurance contributions into account (it is a tax in all but name after all).

The third change is being saved until after the next election, with a 1% increase on National Insurance at all levels, proposed to be effective from 6 April 2011. This will end up giving us effective tax/national insurance rates in 2011-12 of 29%, then 42%, 62% in that small range above £100,000, back down to 42% and then a top rate of 52%. As a tax adviser, perhaps I should not complain about the introduction of such complications to our system.

The simple, and low, rate of capital gains tax (CGT) at 18% in a period of low inflation looks rather appealing in comparison. Commentators were surprised that there were no increases in the CGT rate announced in either the Budget last April or in the more recent pre-Budget report.

The fourth major change, and one that is likely to have a major impact upon partners' approach to saving for retirement, is the proposed ending of higher rate tax relief on pension contributions for those earning over £150,000 pa. This again is intended to be effective from 6 April 2011.

If this was simply how the pension rule changes were left, an obvious planning point for high earners would be for them to maximise their pension contributions in the next two years (and obtain 50% tax relief in the latter of these). The Chancellor has worked this out and introduced 'anti-forestalling' rules with the aim of stopping high earners from accelerating their pension contributions.

You may have needed a stiff drink to stay with this article this far, but if you earn (or have done in recent years) £130,000, you need to stay focused.

Louis Baker is head of professional practices at Horwath Clark Whitehill.