Personal Tax
October 2007 Pre-Budget Report
Tax rates for 2008/09
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 pension 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.
Comment: 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 National Insurance (see Employment Issues) will largely negate the income tax savings for many.
The impact of these changes from 2009/10 are summarised in the table below:
For those earning less than £18,600 a year they will be forced into the tax credit system to top up their earnings.
Allowances
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.
Tax Credits
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:
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the child element of Child Tax Credit will increase by £25 above earnings indexation, in addition to the £150 increase earnings indexation already announced in the Budget
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the income threshold for Working Tax Credit will increase to £6,420
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a higher rate of taper will apply for those in the fast taper band (up from 37% to 39%).
Pensioners
The Chancellor has announced that from April 2008 the Pensions Credit will be increased to a minimum of £124 per week for single pensioners and £189 per week for couples.
Payments on account (POA) threshold
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.
Comment: This measure is expected to remove 367,000 taxpayers from POA, most of which have business income.
Residence and domicile
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 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 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 as at 6 April 2008. In addition non-domiciled individuals will still have to pay UK tax on any income and gains actually remitted to the UK.
Other proposals include:
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users of the remittance basis will lose their automatic entitlement to the personal allowance, currently £5,225, subject to a de minimis of £1,000
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to amend the current rules to remove flaws and anomalies that allow individuals who are assessed only on a remittance basis to sidestep UK tax where it is due on income and gains.
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.
Comment: All non-UK domiciled individuals will need to assess the position with regard to their worldwide income and gains now in advance of the changes from 6 April 2008.
Days of arrival and departure to be counted from 6 April 2008
With effect from 6 April 2008 the days of arrival in and departure from the UK for non-residents will be counted when assessing the 90 day rule.
Comment: All non-UK residents must ensure that they factor in the travel days when calculating the number of days that they can spend in the UK from 6 April 2008. Careful planning on timing of flights etc. should be made to maximise the amount of time available in the UK.
Pensions
The government proposes to extend the existing rules to prevent the abuse of pension tax relief’s 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.