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Pre-budget report: Income tax hike for high earners

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The Government will raise the income tax band for high earners from 40% to 45% by April 2011.

In his pre-budget report today the chancellor of the Exchequer, Alistair Darling, announced employees who earn a salary of £150,000 or more must pay income tax of 45p on each £1 they earn as a means of increasing government funds.

David Marlow, director of Alexander Forbes Financial Services, said: "This is a good offset to increase the tax for these individuals. Although they will be paying higher tax, they will now be able to claim back a higher rate relief on their pension contributions, which will increase their pension pots."

But he added: "Every change in tax thresholds poses a headache for payroll in calculating the changes."

John Jory, deputy chief executive at B&CE Benefit Schemes is unsure whether the change will have a high impact. He said: "High earners will not be the ones whose pension pots are suffering."

In his speech the chancellor said National Insurance Contributions would also be increased by 0.5% for those who earn £20,000 or more from 2011.

Carolyn Steppler, Associate Partner at KPMG in the UK, said: "This is a classic case of jam today, dripping tomorrow. 

Many people will feel mildly better off through the reduction in VAT (though even there, if you drink, drive or smoke it will be clawed back), but it will be payback time in April 2011."

This comes as a surprise for Gary Hull, director of HR services at PricewaterhouseCoopers. He said: "I would have expected cuts in national insurance contributions."

Darling also confirmed the temporary £120 allowance for people who lost out from the removal of the 10p income tax rate would be increased to £145.