Wednesday, 20 March 2013

What tax do I pay?

We're expecting to hear that the threshold for paying basic rate tax, at 20%, will be raised to £10,000 a year earlier than expected.

But, be warned, there's another sort of tax, which kicks in earlier and which low earners will still have to pay.

It's called National Insurance and the starting level at the moment is £7,605 in annual earnings.

Just to recap, then:

The starting rate is 20%.
Currently, you pay on earnings above £8,105.
That threshold is due to rise to £9,440 in April (2013-14 tax year) on its way to £10,000 in 2015-16.
Now we think the Chancellor could bring forward the move to £10,000 to 2014-15.

The rate is 12%.
You pay it on earnings above £7,605.
Your employer pays an additional 13.8% on your earnings above£7,488.

So there will still be National Insurance to pay on earnings under £10,000, unless Osborne pulls a rabbit out of the hat and starts a radical reform of National Insurance, something tax experts have been asking for.

Another thing to watch out for: how he adjusts the threshold for higher rate (40%) tax.

Higher earners start paying the 40% on earnings above £42,475. He could bring this down to pay for the £10,000 personal allowance, catapulting more people into the 40% band.

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