The Budget 2008 – Personal tax
Tax Rates
As previously announced the government proposes to radically change the tax rates for 2008/09 onwards when the 22% basic rate of tax will be reduced to 20%. The higher rate of tax will continue at 40%.
The current starting rate will be abolished and replaced with a new 10% starting rate for savings income. Where an individual’s non savings income (broadly earnings, pensions, trading profits and property income) exceeds the new starting rate limit, then the starting rate will be unavailable. 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).
COMMENT
Gordon Brown had previously announced the reduction of the basic rate of tax by 2% in the Budget last year.
Basic rate taxpayers with earned income between £5,875 and £15,350 a year could lose out due to the withdrawal of the starting rate for non savings income, unless they qualify for the working tax credit. There may also be a significant sting in the tail for higher rate taxpayers with earned income as the changes in the upper earnings limit for national insurance (see Employment Issues section) will largely negate the income tax savings.
Allowances
The 2008/09 personal allowances were announced in October 2007. The personal allowance for the under 65’s is increased in line with inflation to £5,435. Age related allowances have been raised significantly to £9,030 for people aged between 65 and 74 and to £9,180 for those aged 75 and over.
Tax Credits
There are two types of Tax Credits; Working Tax Credit 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 2008/09 of £2,085 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.
Other changes from April 2008 are:
- the income threshold for Working Tax Credit will increase to £6,420 (currently £5,220)
- a higher rate of taper will apply for those in the fast taper band (up from 37% to 39%).
COMMENT
The increase in the income threshold will give more to the family or individual with very low income but the higher rate of taper will eat away at that advantage for those with higher income.
Individual Savings Accounts (ISA’s)
Over the last year the government has finalised the changes to ISA’s which will be introduced from 6 April 2008.
- The annual ISA investment allowance will be raised to £7,200. Up to £3,600 of that allowance can be saved in cash with one provider.
- he remainder of the £7,200 can be invested in stocks and shares with either the same or a different provider.
- ISA savers will be able to invest in two separate ISA’s in each tax year; a cash ISA and a stocks and shares ISA. Mini and maxi ISA’s will no longer exist.
- Mini cash ISA’s, TESSA-only ISA’s and the cash component of a maxi ISA will automatically become cash ISA’s.
- Mini stocks and shares ISA’s and the stocks and shares component of a maxi ISA will automatically become stocks and shares ISA’s.
- All Personal Equity Plans (PEP’s) will automatically become stocks and shares ISA’s.
- ISA savers will be able to transfer money saved in their cash ISA to their stocks and shares ISA.
COMMENT
Existing ISA’s and PEP’s will automatically convert into cash or stocks and shares ISA’s. This will mean a change in the treatment of interest received on any un-invested cash in a PEP. The ISA manager must deduct a flat rate 20% charge and pay it to HMRC.
This rule has always applied to stocks and shares ISA’s and will now apply to interest earned on un-invested cash formerly held in PEP’s.
Now is the time to review your PEP and ISA investments to ensure that you maximise the tax efficiency and investment potential of your plans.
Foreign dividends
The government proposes to introduce amendments to the system of taxation for individuals who own foreign shares. From 6 April 2008 individuals in receipt of foreign dividends will be entitled to a non-repayable tax credit of one ninth of the distribution. The legislation will apply to individuals who own less than a 10% shareholding in the company.
From 2009, individuals with shareholdings in excess of a 10% shareholding will also be eligible for the non-repayable tax credit. The tax credit will not be available where the source country does not levy a tax on corporate profits and anti-avoidance measures will be introduced to ensure these new rules are not subject to abuse.
Residence and domicile
The government will implement a package of reforms announced in the 2007 Pre-Budget Report subject to certain changes. The measures will take effect from 6 April 2008.
The main proposal is that UK residents who are non-domiciled or not ordinarily resident and 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 tax charge of £30,000 on unremitted income and gains. Those with unremitted foreign income and gains of less than £2,000 will however be exempt from this charge.
The charge will apply if an individual has been resident in the UK for at least seven out of the previous ten tax years. Individuals will be able to decide each tax year whether to pay the charge and be taxed on the remittance basis or be assessed on their worldwide income and gains.
Key changes include:
- users of the remittance basis will lose their automatic entitlement to certain allowances, such as the personal allowance and the capital gains annual exemption (unless the £2,000 de minimis applies)
- children will not pay the £30,000 charge
- the £30,000 charge should be creditable against foreign tax
- art works brought into the UK for public display or for repair and restoration will face no new tax charges
- income and gains in offshore trusts will only be taxed when they are remitted to the UK, even if these come from UK assets
- changes will be made to the current rules on remittances to restrict the ability of individuals to sidestep UK tax on income and gains where HMRC believe it is due
In addition, from 6 April 2008, when determining if an individual is resident in the UK, any day where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes. There will be an exemption for passengers who are temporarily in the UK whilst in transit between two places outside the UK.
COMMENT
The government has made some amendments to its initial proposals after consultation with interested parties. It considers that the key question is whether further changes can be made without putting the UK’s competitiveness at risk by undermining the UK’s attractiveness to the internationally mobile.
For any UK resident but non-domiciled individuals with significant overseas income we need to assess the position with regard to the amount of worldwide income and gains before choosing whether or not to use the remittance basis and pay the £30,000 charge.
If you think you will be affected by this change please contact us immediately.
For those non-residents who wish to maximise their days in the UK the change to the rules regarding presence at midnight provides opportunities to plan the timing of flights so that on the day of arrival an early landing gives the benefit of a full day. In the same way a late night departure from the UK gives the benefit of a full day in the UK on the day of departure.
Enterprise Investment Scheme (EIS)
Individuals can claim income tax relief of 20% on qualifying EIS investments. The current annual limit on investment is £400,000 and this limit will be increased to £500,000 subject to State Aid approval.
The EIS, Corporate Venturing Scheme and Venture Capital Trust schemes are intended to support investment in smaller higher risk trading companies. Most trades qualify under the schemes but not those that consist to a substantial extent of excluded activities. The activities of shipbuilding, coal and steel production will be added to these exclusions from 6 April 2008.
Offshore Funds
The government will simplify the rules for offshore funds. In order to retain the favourable tax treatment for investors disposing of an interest in the fund, an offshore fund will no longer have to make a distribution of at least 85% of its income. It will instead be able to ‘report’ income to investors who will then be subject to tax on that reportable income.