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Income tax cut but National Insurance rises

Chancellor Gordon Brown’s surprise Budget package was to cut basic-rate income tax from 22 per cent to 20 per cent from April 2008.

But Brown will increase both the higher-rate tax threshold and National Insurance threshold to 43,000, which will hit people earning between 33,500 and 38,000 hardest due to an extra 11 per cent National Insurance.

People earning 43,000 will pay an extra 950 in National Insurance, offsetting the gains they make on income tax.

Higher-rate tax will be payable only on income above 43,000, up from the current level of 38,000.

These changes effectively mean there will only be two rates of income tax on earnings of 20 per cent and 40 per cent for employees as opposed to the current three rates.

The Chancellor is abolishing the 10 per cent rate for earnings and pension contributions but not for capital gains tax and savings income.

Royal Liver chartered insurer Mark Davies says: “The overall impact on an individual is unclear at this stage given the combination of changes and it will be interesting to see if it makes pensions less attractive to basic-rate taxpayers because they will only get tax relief at 20 per cent instead of 22 per cent.”

Standard Life estate planning specialist Julie Hutchison says: “At first glance, this could be a simplification measure. From a compliance perspective, this reduces the number of income tax bands, although the net effect in terms of tax take is not yet clear.”

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