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The Chancellor has brought forward the tax changes for certain higher rate taxpayers.
From April 2010, a 50% additional rate of tax will apply to taxable income above £150,000.
The original plan, announced in the 2008 Pre-Budget Report, was a 45% rate to be introduced from April 2011.
From 2010-11 there will be three rates of tax for dividends.
Dividends otherwise taxable at the 20% basic rate will continue to be taxable at the 10% dividend ordinary rate and dividends otherwise taxable at the 40% higher rate will continue to be taxable at the 32.5% dividend upper rate.
Dividends otherwise taxable at the new 50% additional rate will be taxable at a new 42.5% dividend additional rate.
From 2010-11, the basic personal allowance will be subject to a single income limit of £100,000.
Where an individual’s adjusted net income is above that figure, the amount of the allowance will be reduced by £1 for every £2 above the limit.
The personal allowance will be reduced to nil from this income limit instead of the two-stage reduction announced at the PBR.
Adjusted net income is calculated in a series of steps. The starting point is net income: i.e. the total of the individual’s income subject to income tax less specified deductions, such as trading losses and payments made gross to pension schemes.
This net income is then reduced by the grossed-up amount of the individual’s gift aid contributions and the grossed-up amount of the individual’s pension contributions which have received tax relief at source.
The final step is to add back any relief for payments to trade unions or police organisations deducted in arriving at the individual’s net income.
The result is the individual’s adjusted net income.
From 2010-11, the dividend trust rate will be increased from 32.5% to 42.5% and the trust rate will be increased from 40% to 50%.
Alison Conley of Ernst & Young commented that costs for entrepreneurs have ‘changed dramatically’ over the past few years
'The proposed increase in the top rate of income tax places one of the highest tax burdens in the OECD on successful UK entrepreneurs,' she said.
'Unlike our European competitors, the chancellor has chosen to directly tax higher earners, rather than raise higher tax revenues via the indirect taxation route.'
Ms Conley added that the new measures ‘are likely to have serious implications in terms of making the UK an attractive place for businesses to establish’.
For further reactions from tax professionals to the new 50% income tax rate, click here.
