Payroll – likely tax changes ahead

Recently appointed Chancellor, Sajid Javid, has been tasked with making changes to income tax and National Insurance Contributions, following through on the new Prime Minister’s pre-leadership election promises.

So what are the likely changes to income tax and NIC thresholds under the new Chancellor?

Income Tax

The new Prime Minister (PM) has pledged to give a tax cut to higher earners by raising the threshold at which people pay 40% tax from £50,000 to £80,000.

Following criticism about favouring more wealthy taxpayers, the pledge was downgraded to an “ambition” and would be part of a "package" of measures designed to reduce the tax burden for both low and middle earners.

The PM also remarked that “too many people are being dragged into the higher rates” of income tax - fiscal drag. The number of people facing 40 per cent tax has grown from around one and a half million in the early 1990s to well over four million today.

No specific mention has yet been made about fiscal drag on the 45 per cent rate of income tax. The threshold for this has remained the same since it was introduced in 2010. If it had risen with inflation it would now be £180,000, according to the Institute for Fiscal Studies (IFS).

Another threshold which often escapes attention (and has not been mentioned by the new PM) is where income falls between £100,000 and £125,000 and a rate of 60 per cent applies  - due to the gradual withdrawal of personal allowances. The £100,000 point has not changed since 2010.

National Insurance Contributions (NICs)

A promise has been made to increase the NIC threshold, which currently starts at earnings of £8,632, to help lower earners. No figure has yet been given for the increase in the threshold. All the PM said was: “We will bring forward a tax proposal ... that begins by lifting thresholds for those on lowest pay.”

According to the IFS, raising the threshold from £8,632 to £12,500 (the income tax threshold) would cost £11 billion per year. If the employer threshold was also changed, it would be £17 billion per year. Each time you raise the NICs threshold by £1,000 it costs £3 billion.

National Minimum Wage

The PM has also promised to deliver a higher living wage and we await details in the Autumn Budget as to what this will be from April 2020.

The shape of things to come

The change in Prime Minister and Chancellor last July appears to have created an opportunity to alter income tax and NIC thresholds, and this should result in changes to PAYE codes once the specific announcements have been made.

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