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Budget: Income tax rate cut but reliefs capped

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The top rate of income tax will be reduced from 50% to 45% per cent from April 2013, but a new cap on tax reliefs will increase the effective rate for some taxpayers and experts warned that people on means-tested benefits would have much of the benefit of an increased personal allowance clawed back.

The income tax personal allowance, set to increase to £8,105 next month, will increase next year to £9,205 – ‘within touching distance’ of the government’s stated objective of a £10,000 allowance, the Chancellor said.

The further £1,100 increase would be largest increase in the personal allowance in both cash and real terms for the last thirty years, according to the Treasury. But only ‘a proportion’ of the benefit would be passed on to higher rate taxpayers, it said.

Age-related allowances will be frozen from 6 April 2013 at their 2012/13 levels until they are in line with the personal allowance.

John Cridland, CBI Director-General, said the plan to reduce the top rate of tax to 45% would ‘show our top and aspiring talent that this government wants them to create wealth here’.

The CIOT’s Low Incomes Tax Reform Group said that for those receiving means-tested benefits, much of the benefit from the tax cut would be clawed back because ‘the less tax you pay, the higher your net income, and the less you are entitled to by way of benefits’. Someone on housing benefit and council tax benefit, for example, would see ‘only 15% of the theoretical increase flow through into their net income’.

LITRG’s view was echoed by Patrick Stevens, Tax Partner at Ernst & Young, who said the increase in the personal allowance was ‘unlikely to help the poorest taxpayers’.

Tax reliefs

There will be a new limit on ‘uncapped’ income tax reliefs. ‘For anyone seeking to claim more than £50,000 of relief, a cap will be set at 25% of income. This will increase effective tax rates and help ensure that those with the highest incomes pay a fairer share,’ the Treasury said.

The new limit will not apply to reliefs that are already capped, as ‘to do so would reduce the amount of support the tax system gives, for example, to enterprise and pension contributions’.

The government said it would explore with philanthropists ways to ensure that the measure did not impact significantly on charities that depend on large donations.

Child benefit

The proposed withdrawal of child benefit will be eased so that an income tax charge will apply only to households where someone has an income over £50,000 a year: ‘For households where someone has an income between £50,000 and £60,000 the charge will apply gradually, preventing a cliff edge effect. Only households where someone has an income in excess of £60,000 a year will no longer gain from child benefit.’