Income tax higher rate threshold changes

Changes by the Government to the ‘higher rate threshold’, which is the level of income after which taxpayers begin to pay the 40 per cent higher rate of tax, mean that it will increase by 1 per cent, for 2014/15 and 2015/16 to £41,865 and £42,285 respectively.

The higher rate threshold is the sum of the personal allowance and the basic rate limit and the changes will affect income tax payers, employers and pension providers. This measure, first announced in 2012, is part of the government’s wider fiscal consolidation package, aiming to contribute to tackling the fiscal deficit and support public services.

Based on the Office for Budget Responsibility (OBR) forecast for the Retail Price Index (RPI), inflation to which the higher rate threshold would be indexed, the effects of the measure are likely to be that the higher rate threshold will be £865 and £1,615 lower in 2014-15 and 2015-16 than would be expected.

The National Insurance contributions (NICs) upper earnings limit and upper profits limit will continue to be aligned with the level of the higher rate threshold by separate regulations.

In terms of impact, the changes to the higher rate threshold may well affect individuals’ employment decisions and their disposable incomes. The overall impact on work incentives is likely to vary as affected individuals may choose to work more in order to maintain their post-tax incomes.

The higher rates of tax could depress individual purchasing capacity and consumption but it is expected that overall the macroeconomic impact will be small.Impact on employment (and hours worked) will depend on other measures relating to personal tax and NICs as well as aggregate labour demand and the performance of the wider economy.

For individuals and households, the Government predicts that no one will pay more income tax in cash terms as a result of the 1 per cent increase in the higher rate threshold in 2014-15 and 2015-16.

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