The Chancellor has effectively torn up his original proposal to introduce a 45% top rate in 2011. Instead the top rate will be introduced a year earlier, on 6 April 2010 and the increase over the existing top rate will be doubled as the new rate will be 50%. This also affects the rate of tax on dividends and the Tax Rate on Trusts.
Baker Tilly analysis
The Chancellor has recognised the need to start repaying the cost of his economic stimulus package sooner and to collect more tax to reduce the debts he is incurring more quickly.
This is consistent with his acknowledgement that the recession will be more severe than he estimated in the Pre-Budget Report in November 2008.
The threshold for the new top rate remains £150,000, as originally proposed, but increasing the rate and bringing the measure forward to 2010/11 will have a significant effect on the Government’s cash flow. It will boost tax receipts due on 31 January 2012 when the balancing payments for 2010/11 and the first payments on account for 2011/12 will be due.
The Tax Rate on Trusts will not have a £150,000 threshold: the rate applies to all trust income above £1,000 for a single trust or a series of connected trusts.
The top dividend tax rate will be 42.5% and it must be remembered that dividends are grossed up by a 10% non-repayable tax credit, so that a net dividend of £100 represents taxable income of £111.
The current effective amount of higher rate tax payable on dividends works out at 25% of the dividend received: from 6 April 2010 the new effective top rate will be 36.11%.
This rate will also impact heavily on contributors to pension schemes who are to lose the benefit of higher rate tax relief on contributions as well as leading to increases in the rates of tax charged on withdrawals from pension schemes.