As previously announced the government proposes to radically change the tax rates for 2008/09 onwards when the 10% starting rate will be abolished for earned and pensions income and the 22% basic rate of tax will be reduced to 20%. The higher rate of tax will continue at 40%.
The starting rate will continue to be available for savings and investment income. There are no changes to the tax rates applicable to dividends. However the rate of tax applicable to capital gains will change significantly to a flat rate of 18% for 2008/09 (see Capital Taxes section).
The income tax bands for 2008/09 were not announced in the Pre-Budget Report. Details of these are normally made available in the main spring Budget.
Gordon Brown had previously announced the reduction of the basic rate of tax by 2% in the Budget earlier this year. He also announced that the point at which people start paying the higher rate of tax will be increased significantly to £43,000 from 2009/10.
There is, however, a significant sting in the tail for some of those with earned income. The changes in the upper earning limit for NIC (see Employment Issues) will largely negate the income tax savings for many.
The Chancellor did not announce the level of income tax allowances for 2008/09. The current personal allowance for those under the age of 65 is £5,225.
There are two types of Tax Credits; Working Tax Credit (WTC) and Child Tax Credit (CTC). The CTC is potentially available to families who have responsibility for one or more children. There are several elements to the credit but broadly the maximum is an annual amount for 2007/08 of £1,845 per child together with a family element (generally one per family) of £545 per annum. The amount per child has been increased but the family element has been frozen since the introduction of the credit.
Some credit is likely to be payable for 2007/08 if a family’s income is less than £58,175 a year, or £66,350 if there is a child under one year old.
The government announced that from April 2008:
The Chancellor has announced that from April 2008 the Pensions Credit will be increased to a minimum of £124 for single pensioners and £189 for couples.
Individuals who complete a self assessment tax return have to make direct payments to HMRC of their income tax and Class 4 national insurance contributions. The POA are made on 31 January and 31 July each year with a balancing payment for the tax year being made by 31 January following the end of the tax year. The POA are broadly made by reference to the previous year’s liability. POA are not due where more than 80% of the previous year’s liability was met by tax deductions at source from income such as employment or savings.
Currently where the previous year’s liability is less than £500 no payments on account are due and the taxpayer just makes one payment on 31 January following the end of the tax year of their full liability.
From 2009/10 the £500 threshold will be doubled to £1,000. The first POA affected by this change will be those due on 31 January and 31 July 2010.
This measure is expected to remove 367,000 taxpayers from POA most of which have business income.
The government has announced the completion of the residence and domicile review with a package of reforms which will take effect from April 2008.
The main proposal is that UK residents who are non-domiciled, who wish to continue to be taxed on a ‘remittance basis’ rather than on their worldwide income and gains, will have to pay an annual charge of £30,000. This measure is being introduced to ensure that they contribute in respect of the foreign income and gains which they keep abroad and on which they do not pay UK tax. The charge will apply if they have been resident in the UK for more than seven years.
Other proposals include:
The government will consult on the detail of these proposals and on a wider range of options, including an option to make those individuals who are resident in the UK for more than ten years contribute more.
The government proposes to extend the existing rules to prevent the abuse of pensions tax reliefs through members surrendering rights under registered pension schemes during their lifetime or through reallocation of assets after a member’s death.
The measures will have effect for surrenders made on or after 10 October 2007 and for increases in pension rights attributable to the death of a member when the member dies on or after 6 April 2008.