Personal Tax
Tax rates for 2007/08
For the eighth consecutive tax year, income tax rates remain at 10%, 22% and 40%. The special rules for savings income and dividends continue to apply.
Tax rates for 2008/09
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 and capital gains. There are no changes to the tax rates applicable to dividends.
Comment
The Chancellor is obviously keen to hit the headlines with his last Budget by announcing the reduction of the basic rate of tax by 2%. 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 those with earned income. The changes in the upper earning limit for NIC (see Employment issues) will largely negate the income tax savings. |
Allowances
The 2007/08 personal allowances were announced in last December's Pre-Budget Report. The personal allowance for those under 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 (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.
In order to finalise a Tax Credits award given for the previous tax year, claimants may have to complete an annual declaration. The declaration will also renew any claim for the current year. The date for renewals of Tax Credits for 2007/08 will be 31 July 2007.
Comment
Last year the renewal deadline was brought forward to 31 August from 30 September. The 31 July deadline is very tight but it is possible to renew using estimated figures and then provide final figures by the following 31 January. |
Individual Savings Accounts (ISAs)
When ISAs were introduced in 1999 they were guaranteed to run for ten years to 2009. Currently the overall annual investment limit is £7,000 with a maximum of £3,000 in cash and this was guaranteed to run until the end of 2009/10.
The government is now making the ISA a permanent feature of the savings landscape. A number of reforms will be introduced from 6 April 2008:
- The mini/maxi distinction within ISAs will be removed. The government will continue to allow individuals to hold these components with either the same or different providers.
- The maximum amount which can be invested into a cash ISA will be increased to £3,600.
- The maximum amount which can be invested into a stocks and shares ISA will be £7,200, subject to an overall limit of £7,200 subscribed into both ISAs in a tax year.
Further reforms are also expected:
- Individuals with funds saved in the cash component of ISAs from previous years will be able to transfer those funds into the stocks and shares component without affecting their annual investment limit.
- Personal Equity Plans will be brought within the ISA wrapper.
- Child Trust Fund accounts will be able to rollover into ISAs when they start to mature from 2020 onwards.
Comment
Over 16 million people - more than one in three adults - now have an ISA. |
Foreign dividends
The government proposes to introduce in Finance Act 2008 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 and in total they receive less than £5,000 of dividends a year from non UK-resident companies.
Pensions
The new pension regime took effect from 6 April 2006, referred to as 'A' day. There is now a single set of tax rules for all registered pension schemes.
A number of anti-avoidance measures were introduced in 2006 and the government has considered that further provisions are necessary.
Alternatively Secured Pensions (ASPs)
Comment
The tax rules for pensions require an individual to secure an income before they reach the age of 75. Most people will have an annuity or scheme pension but the ASP has been provided as an alternative. ASPs were designed for those who have a principled religious objection to annuitisation. The government is therefore trying to restrict the use of ASPs to their original limited purpose. |
As previously announced, the 2007 Finance Bill will introduce further restrictions to funds invested as an ASP by:
- introducing a minimum income requirement of 55% of the annual amount of a comparable annuity
- setting a higher maximum income withdrawal of 90% of the annual amount of a comparable annuity
- imposing an unauthorised payments charge where ASP funds remaining on the death of a member are transferred to pension funds of other members in the scheme
- introducing legislation to deal with the situation where a provider has been unable to trace a scheme member by age 75.
Previous legislation introduced an inheritance tax (IHT) charge on left over ASP funds on the death of the scheme member. The Finance Bill will introduce changes to the IHT rules so that the IHT nil rate band will be set in priority against the estate of the deceased excluding ASP funds. Special provisions will be introduced to cover the situation where there is an amount of the nil rate band remaining available.
The new provisions will apply from 6 April 2007.
Pensions term assurance
The government has become aware that life insurance policies that provide lump sum death benefits alone are being offered as personal pension arrangements and thus eligible for tax relief.
The Finance Bill will introduce a measure to remove an individual's entitlement to tax relief on any pension contributions they pay that are used to fund personal term assurance policies. The measure will not affect the relief available for contributions paid by employers.
For contributions under occupational registered pension schemes the measures will take effect for payments made on or after 1 August 2007 in respect of personal term assurance policies unless the insurer receives the application for the policy before 29 March 2007.
For contributions under other registered pension schemes it will take effect for all contributions made on or after 6 April 2007, unless the insurer received the application before 14 December 2006 and the policy taken out before 6 April 2007.
Comment
A number of pension providers have been marketing pensions term assurance with the expectation of the purchaser obtaining full tax relief on the costs of term life cover. It would seem the number of policies sold has been far greater than the government had predicted. |
Service charges and sinking funds held on trust by landlords
Many leases provide for the landlord to collect service charges from tenants to create reserves or 'sinking funds' to cover the cost of irregular and expensive repair works on the property. These reserves are held on trust and currently taxable at the special trust rate of 40%.
Legislation will be introduced in the Finance Bill to extend an existing exemption from the special trust rate which currently applies to Registered Social Landlords and other social landlords to private sector landlords.
Comment
The funds are generally held on bank deposit which will mean that income will be taxed at the savings rate of 20%. |
Gift Aid
For donations to charities to be eligible for Gift Aid tax relief there are limits on the value of benefits that individuals and companies can receive as a result of making those donations. For donations made on or after 6 April 2007, which are in excess of £1,000, the limit on the value of benefits received will be doubled from the current 2.5% to 5% of the donation. The overall limit on the value of benefits received will be doubled from £250 to £500.
Anti-avoidance: life insurance policies
Legislation will target policies that are used in schemes to avoid income tax on investment income. It will only apply where premiums exceed £100,000 in any year into short to medium term life insurance policies and commissions are passed on or reinvested in the policy by an intermediary. In such circumstances the amount of the premium allowed in calculating the gain is restricted to the true cost to the policyholder, taking into account the benefit to the policy holder of any commission rebate.
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