Tax and NI: Middle classes must stump up to cut the deficit

Triple whammy targets families earning above the national average

Middle Britain got a sense of the tax pain to come after the next election in the Chancellor's pre-Budget report yesterday. Income tax personal allowances were frozen, national insurance contributions increased again and those hoping to leave property to their loved ones were dealt a blow as the amount they could give free of inheritance tax (IHT) was frozen.

"Personal allowances, National Insurance and IHT: it's bad news for the middle classes," said Chas Roy Chowdhury, head of tax at the Association of Certified Chartered Accountants.

"A lot of the attention in the run-up to the pre-Budget report focused on bankers' bonuses but it seems the Chancellor has chosen now to start turning the screw on families that earn a little more than average," he added.

The increase in national insurance contributions by 0.5 per cent from April 2011 (on top of the 0.5 per cent rise announced in the last budget) has been criticised as a covert tax rise.

"The Government have form here. Instead of raising the income tax rate what they have tended to do is increase NICs or freeze personal allowances. This time they've done both," said Erike Jupe, a tax partner at London accountancy firm Osborne Clark.

Tim Walford-Fitzgerald, from accountancy firm HW Fisher, says the 0.5 per cent rise in NICs comes at a bad time for the economy: "The rise coincides with when many expect the employment situation to start turning around. It will apply to employers as well as employees, making it costlier for businesses to recruit and retain staff. In effect this is a tax on jobs."

But with the government deficit predicted to be as high as £175bn next year the Treasury could badly do with the £3bn that the NICs increase raises.

Those on lower incomes will be cheered by the Chancellor's promise to raise the starting point for NICs so that no one earning under £20,000 a year will lose out. However, they will suffer from the decision to freeze income tax personal allowances during the 2010-2011 tax year.

For those on middle to high incomes the news on personal allowances was worse still: those paying 40 per cent tax will have their allowance held for a year from April 2012.

"This is really damaging for many ordinary families. Teachers, middle managers and many working in the health service will be affected by this double whammy," Mr Chowdhury said.

The decision will re-ignite the debate of fiscal drag – where more and more people are pulled into the 40 per cent tax bracket because allowances do not keep pace with wage rises.

"If you're earning £40,000 or just under now," Mr Walford-Fitzgerald said, "there is every chance that once this freeze on allowances is over you will be paying 40 per cent tax. Allowances have not been keeping pace with wages and have been tracking inflation instead. Now they will stop dead. The unfair thing is that many of the top earners and business owners can manipulate their incomes so that they pay as little tax as possible while those on middle incomes with relatively ordinary jobs don't have this option, so they will end up bearing the brunt."

An extra 70,000 people are now expected to be paying 40 per cent income tax by 2013, bringing an extra £400m into the Treasury.

Inheritance tax is likely to be a battleground in the general election. The Tories have promised to raise the size of an estate that can be left free of IHT to £1m but the Chancellor chose to reverse a previous commitment to raise the IHT threshold to £350,000 next April, instead leaving it at £325,000 – a decision that has left a clear divide between Labour and the Tories.

Lower down the income scale, talk of IHT thresholds may seem a moot point. And in what the Chancellor dubbed a pre-Budget all about "fairness" they received some good news, including rises in child benefit, free school meals for an extra 500,000 children and continuation of the Homeowner Mortgage Support Scheme for an extra six months.

The view from the marginals: 'Darling made tough choices'

Michael Wager, a 25-year-old customer services consultant, earned about £16,000 last year.

"The lower VAT rate has never really affected me because I was trying to keep my spending low to save money. Unfortunately, the relatively low interest rate means it has taken me longer to save the money I need. I've also found the costs of running a car increasingly prohibitive, which is frustrating because a car is becoming a necessity.

"I'd like to see a more obvious correlation between the rising tax receipts and an improvement in public transport. There were some potentially unpopular things in the report, for example, the rise in VAT and National Insurance rates. They are probably necessary in the longer term but in the short term they are vote-losers.

"That said, I would be more tempted to vote Labour in the next election because I think they are making tough choices and not simply chasing votes.

"Of course, if interest rates stay low – and I expect them to do so in order to stimulate economic growth – then, as a saver, I am less keen."

Constituency: Gloucester; Labour Majority in 2005: 4,271

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

News
people
Sport
FootballGerman sparks three goals in four minutes at favourite No 10 role
News
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
Sport
A long jumper competes in the 80-to-84-year-old age division at the 2007 World Masters Championships
athletics
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Sport
Radamel Falcao was forced to withdraw from the World Cup after undergoing surgery
premier leagueExclusive: Reds have agreement with Monaco
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Life and Style
Walking tall: unlike some, Donatella Versace showed a strong and vibrant collection
fashionAlexander Fury on the staid Italian clothing industry
Arts and Entertainment
Gregory Porter learnt about his father’s voice at his funeral
music
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Life and Style
Children at the Leytonstone branch of the Homeless Children's Aid and Adoption Society tuck into their harvest festival gifts, in October 1936
food + drinkThe harvest festival is back, but forget cans of tuna and packets of instant mash
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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