No escape for the rich from Conservative cuts

Having been the target of the final two Labour budgets, many higher earners may be dismayed to be back in the sights, particularly of a Conservative Chancellor. But those on above-average incomes will nevertheless be counting the cost of Budget day.

Although income tax rates have stayed the same, potentially hundreds of thousands of people who would not consider themselves high earners will find that before too long they will be paying 40 per cent tax. This is because the Chancellor has decided to freeze the higher-rate threshold, so that taxable earnings between £37,401 and £150,000 will be taxed at 40 per cent until April 2014 at least. The migration of large numbers of people from the basic to the higher rate of income tax, known as "fiscal drag", will hit households in London and the south-east the hardest as they generally have higher earnings than the rest of the UK.

More modest higher earners may also be caught by the Chancellor's decision to phase out tax credit payments for those earning more than £40,000 a year. And for very high earners the headlines are even less cheery as the new additional tax rate of 50 per cent on earnings over £150,000, introduced in April, will continue regardless of the change in government.

However, critics of the last government's decision to reduce tax relief on the pensions contributions of those earning more than £150,000 will be pleased that Mr Osborne now plans to review whether the £3bn a year to be raised can be found through an alternative scheme, such as capping the amount of money that can be paid into a pension each year.

"Replacing the previous government's complex proposals with an elegant solution that achieves the same revenue objective is a move in the right direction," said Trevor Matthews, chief executive of Friends Provident. "I am hopeful this will bring an end to the tinkering with tax relief on pension saving and now we can look forward to a more simplified and stable approach."

However, Andrew Cawley, from accountancy firm KPMG, said that the potential backtracking on reducing tax relief for those earning more than £150,000 could mean that many more higher-rate taxpayers will eventually be affected. "Rather than the previous approach of reducing tax relief solely for those on salaries of £150,000 and above, the Government intends to consult on an annual allowance for higher-rate pension tax relief, of between £30,000 to £45,000," he warned.

"This will bring many more higher-rate tax payers into the net – rather than affecting 2 per cent of pension savers, it could now impact many more higher-rate taxpayers, around 10 per cent of all savers."

Other tax changes that will predominantly hit higher earners include the rise in capital gains tax from 18 to 28 per cent, though Mr Osborne resisted calls for an increase to 40 per cent.

The fact that the Chancellor chose not to raise CGT to 40 per cent means that some high earners may still be tempted to disguise their income as a capital gain rather than pay 40 or 50 per cent income tax. Mr Osborne said he nevertheless expected the CGT increase to bring an extra £1bn into Treasury coffers as fewer people than now would use the capital gain ploy to avoid paying higher-rate income tax.

Analysts dismissed fears that a CGT rise would cause a fire sale of second homes as buy-to-let investors piled for the exit.

"This move is not likely to have a negative impact on the property market as buy-to-let investors are unlikely to sell off their buy-to-let properties," said Stuart Law, chief executive of property investment company Assetz.

"Professional property investors are generally looking at the long-term benefits and see the importance of the regular income rather than short-term capital gains."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
Highs and lows of the cast's careers since 2004
New Articles
i100... with this review
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam