Budget brings National Insurance hike for higher earners

National Insurance (NI) changes confirmed in the budget will see those earning over £40,000 paying a higher rate.

However, analysis by Standard Life shows those earning around £35,000 a year will be as much as £32 a year better off as their income tax bill should drop – as the basic rate falls 2p to 20 per cent - but they will pay no more NI.

Andrew Tully, senior pensions policy manager at Standard Life said: "The tax and NI changes being introduced in April are more about simplifying the number of rates and bands than cutting tax bills, so some people will gain a little and some people will lose a little."

John Whiting at the Chartered Institute of Taxation explained the changes date back from before the Budget but have been forgotten by many and can be confusing.

"There will be winners and losers from the change," he said

"Broadly those earning above £18,000 will gain, those earning below £18,000 will lose."

He added those earning over £40,00 will see a "tax swing" as what people gain from income tax reductions will be lost from NI increases, and while they will make gains they will be "not as much as thought".

Lower income earners protected by tax credits and minimum income guarantees should be unaffected by the changes, but some will find tax bills rising.

NI changes see an increase in the upper earnings limit for contributions and the higher rate threshold has been raised in line with RPI to £36,000. Next year this will rise by £3,000 to match the income tax 40 per cent level.

At the bottom of the scale those earning under £15,000 will be worse off as the 10 per cent starting rate for income tax will be scrapped.

John Andrews, at the Chartered Institute of Taxation (CIT), said: "As from April 6th 2008 millions of people the government class as being 'in poverty' are going to be asked to pay more income tax than they did in 2007/08.

"At the same time many groups on low incomes will have their lives complicated by new obscure rules at a time when HM Revenue & Customs (HRMC) has no hope of devoting the manpower to explain those rules to those who need to know. It does seem perverse to describe these features as being part of a fairness and simplicity package."

Across the board the greatest tax hit will come for drinkers and drivers.

Douglas McWilliams, chief executive of the Centre for Economics and Business Research (CEBR), said: "Chancellor Darling's first Budget was at least as low key as expected and as usual the important elements were not in the main speech.

"He is taking an additional £625 million from alcohol users and eight different tax increases on road users will take a staggering £1,735 million a year from road users. And this is before any additional congestion charges that are also threatened in the Budget."