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Budget déjà-vu

BUDGET: Don't forget that last year's most significant Budget changes are about to come into force
March 22, 2011

Many of this year's most important fiscal changes were known about long before the Chancellor set foot inside the Palace of Westminster. Not because of Whitehall's news-management machine, but because they were announced in 2010 - and most take effect within the next fortnight.

Last year certainly saw plenty of activity in the Treasury; first, a change of government and priorities, then a blizzard of new legislation relating to tax, savings and pensions. Many of these new rules take effect on 6 April 2011, and their main burden will fall on high earners and families.

Squeezing the rich

Higher earners face a significantly increased tax bill thanks to a reduction in the 40 per cent higher rate tax threshold and an increase in national insurance (NI) contributions.

While the government has made good on its pledge to increase the tax-free personal allowance (this will rise from £6,475 to £7,475) they have also made sure that higher earners do not benefit from the increase. Those who have higher incomes will pay 20 per cent tax on the next £35,000 they earn and 40 per cent tax on any amounts above this, until they reach the highest rate of tax, 50 per cent, paid on income above £150,000.

The changes mean that those whose income is over £42,475 (£35,000 plus the personal allowance of £7,475) will pay 40 per cent tax on their earnings above this amount.

However, it is the increase in national insurance (NI) contribution rates which tax analysts say will be the biggest extra tax cost for higher earners. A percentage point increase will see NI contributions rise from 11 per cent to 12 per cent for employees and from 8 per cent to 9 per cent for the self-employed.

Individuals with earnings above £42,475 will have NI deducted at 2 per cent on the uppermost slice of their pay, as well as NI at 12 per cent deducted from earnings below this threshold.

Families earning just above the higher rate tax threshold are the most likely to feel the pinch with rising NI contributions, a reduction to the higher rate tax threshold and sweeping changes to child tax credits. Child benefit will also be frozen for three years before being removed from 40 per cent taxpayers altogether in April 2013.

■ What to do: A family business that is planning to pay out profits as bonuses should do it before 5 April and share the NIC savings with the recipients.

With regards income tax, remember that everyone has a tax free personal allowance (soon to be £7,475). If one spouse is not a higher-rate taxpayer, income producing assets can be transferred to that spouse, who can then use their personal tax allowance and basic rate band to reduce the joint income tax rate. Even if an asset is only put into joint ownership the day before it produces income such as interest or a dividend - that income will still be split equally between both owners.

Reduction in pension allowance

Another way to make sure your income tax bill stays under control is by making use of tax-efficient investments. While individual savings accounts (Isas) offer useful tax-free returns, pensions offer tax relief on contributions - making them of particular benefit to higher earners. But not as attractive as they were; come 6 April, tax relief on pension contributions will be restricted to £50,000 a year, compared with the £255,000 maximum for the current tax year.

■ What to do: For many high-net-worth individuals the reduction in the annual allowance is actually good news. Labour's earlier plans for a cap on the rate of tax relief for higher earners means currently individuals earning over £130,000 a year can only contribute up to £20,000 into a pension. But a much clearer pension regime will be introduced in the new tax year where contributions will attract relief at an investor's marginal rate. This means the highest earners will receive 50 per cent tax relief on all their contributions up to £50,000.

New carry-forward rules are also being introduced, which will allow higher earners to make contributions totalling £80,000 in 2011/2012 by carrying forward their unused allowance from the previous year (£30,000) plus their annual allowance of £50,000. Unused allowances for the prior three tax years may be used.

For those who earn between £50,000 and £130,000, however, it could be a good idea to maximise pension contributions this tax year as you can contribute up to 100 per cent of earnings and receive 40 per cent tax relief. From 2011/12 you will be restricted by the annual allowance of £50,000.