Alistair Darling may have a few surprises up his sleeve when he unveils his
first Budget next week, but some of the biggest changes that will come into
force this April are already known.
Income tax
One of the most significant changes is the adjustment that the Chancellor is
making to income tax bands. As part of a drive to simplify the system, the
10 per cent band will be scrapped from April 6, the start of the new tax
year, and the basic rate of tax will drop from 22 per cent to 20 per cent.
There have been no announcements - yet - about changes to the higher-rate
threshold of £34,600, after which income is taxed at 40 per cent, but
it is expected to rise to about £36,000 from April. When coupled with the
standard personal allowance, which is rising by £210 to £5,435, it
means that individuals will start paying higher-rate tax on incomes above
£41,435.
National insurance
The Chancellor is also making tweaks to the amount of national insurance (NI)
that higher earners pay. The upper earnings limit, up to which you pay the
standard rate of 11 per cent, is being increased from £670 a week to £770
(£40,040 a year). Any earnings above the limit are then taxed at 1 per cent.
The move, designed to align the NI upper earnings limit more closely with
the higher-rate income tax threshold, will hit middle and higher earners
because they will pay 11 per cent on weekly earnings between £670 and £770,
rather than the 1 per cent that applied previously on earnings above £670.
Allowances
For pensioners who might have been hit by the removal of the 10 per cent tax
band, the Treasury has said that it will increase the personal tax allowance
for the over-65s by 20 per cent, up from £7,550 to £9,030 for those aged 65
to 74, increasing from £7,690 to £9,180 for those aged 75-plus.
A couple, both aged 65, can jointly earn £18,060 a year tax-free. Retired
couples, therefore, are being urged to take advantage of the more generous
allowances by arranging their finances accordingly. Taking into account all
these changes, a pensioner over the age of 65 with an income of £10,000 a
year will be £77 a year better off.
A low-paid worker on £10,000 a year will be £107 out of pocket, but over-25s
can apply for working tax credits. Workers earning more than £18,500,
meanwhile, will be better off because the reduction in the basic rate more
than compensates for the removal of the 10 per cent tax band.
Likewise, workers on £27,000 a year will have an extra £233 in their pockets,
while someone earning £50,000 will keep an extra £380 of his or her salary.
John Whiting, of PricewaterhouseCoopers, the accountant, says: “With a cut in
income tax, people might think that they are better off. In fact, higher
earners will not see much difference and middle earners receive only a small
gain. Those on about £10,000 will actually lose out.”
The personal allowance for other taxpayers, and the married allowance for
pensioners, are set to increase in line with inflation.
The changes in income tax do not only have an impact on the salary your
receive at the end of the month. The reduction in the basic rate also
reduces the amount of tax relief your pension contributions receive.
Pensions
At the moment, the Government gives tax relief of 22 per cent on your pension
contributions if you are a basic-rate taxpayer and 40 per cent if you are a
higher-rate taxpayer, effectively refunding the income tax that you have
paid on the amount contributed to your pension. For basic-rate taxpayers,
this means that a £10,000 pension contribution is topped up to £12,820. In
the next tax year, however, the contributions will be topped up by only 20
per cent, to £12,500.
Tom McPhail, of Hargreaves Lansdown, the independent financial adviser, says:
“What it means is that if you are contemplating investing a lump sum,
there is a pressing need to do so before the end of the tax year.”
Gift Aid
The change in income tax bands also means that there will be a reduction in
the amount of tax relief on donations made through Gift Aid. Money donated
to charity through this scheme by basic-rate tax payers is currently topped
up by 22 per cent, but this will fall to 20 per cent in April. The Charities
Aid Foundation believes that UK charities could loose up to £90 million a
year.
Savings
The annual Isa limit will be raised from £7,000 to £7,200. The distinction
between maxi and mini-Isas will be abolished, to be replaced by cash Isas
and stocks-and-shares Isas. Anything up to the full £7,200 can be invested
in a stocks-and-shares Isa, while the maximum that can be invested in a cash
Isa is £3,600.
Personal equity plans (Peps), the forerunner to Isas, will be brought under
the Isa umbrella and investors with cash Isas will be able to transfer them
into stocks-and-shares Isas. However, savers with stocks-and-shares Isas
will not be able to switch the other way. Industry experts have complained
that this inability to switch from shares into cash does not offer investors
a level playing field and the increase in Isa limits is a very modest one.
Capital gains tax (CGT)
Accountants and business people are still lobbying the Chancellor to have a
rethink on his CGT plans, but so far he has made only modest changes to the
regime announced in the Pre-Budget Report last October.
The top rate of 40 per cent is being replaced by a flat rate of 18 per cent.
But this good news is balanced by the abolition of two tax reliefs:
indexation relief and taper relief. Indexation relief reduces an investor's
gain by the annual rate of inflation for years between 1982 and 1998. Taper
relief, which started in 1998, cuts the percentage of the gain that is
taxable, depending on the type of investment and the length of time it is
held.
For non-business assets, such as shares, funds and property held by private
investors, taper relief reduces progressively a higher-rate taxpayer's
effective tax rate from 40 per cent to 24 per cent over ten years (20 per
cent to 12 per cent for basic-rate taxpayers). For business assets, such as
companies built up by individual entrepreneurs and company shares held by
employees of that company, the effective CGT rate is reduced to 10 per cent
after only two years (5 per cent for basic-rate taxpayers).
The Chancellor's one big concession is the so-called entrepreneur's relief.
Individuals selling shares in a company in which they hold at least 5 per
cent of the share capital will be taxed at only 10 per cent, rather than 18
per cent, on the first £1 million of any gain.
Budget predictions at a glance
Tax experts are predicting that Alistair Darling may raise the amount that
high earners pay in national insurance (NI). At the moment the NI rate for
income of more than £34,600 is 1 per cent, but the Chancellor could increase
this to 2 per cent. He could also introduce a higher NI rate of 3 per cent
for earnings above £100,000.
Taxpayers have become used to hearing about stealth taxes in the Budget.
However, John Whiting, of PricewaterhouseCoopers, the accountant, says that
the effect of fiscal drag on tax thresholds will effectively work as a
stealth tax.
Mr Whiting says: “Ten years ago there were two million people paying
higher-rate tax, but there are now nearly three-and-a-half million. By not
increasing the rates in line with inflation, the Chancellor will raise a
large amount of money.”
Another example of fiscal drag is the threshold on stamp duty, the tax on
buying a property, which has failed to keep up with rising house prices.
Patrick King, of MacIntyre Hudson, another accountant, says that Mr Darling
may increase the threshold from £125,000 to £150,000, and introduce two new
bands, of 5 per cent for houses valued at more than £750,000 and 6 per cent
for those costing £1 million-plus.
Revenues from environmental taxes have actually been falling in recent years,
so the Chancellor may choose to introduce more taxes with environmental
goals. One possibility is the introduction of a “pay-as-you-dump” levy on
household waste.
Accountants predict that the Chancellor will seek to limit the amount of tax
relief that high earners receive on pension contributions, by reducing the
maximum contribution eligible for tax relief, from £225,000 to £100,000.
It is also predicted that the Chancellor will announce yet another crackdown
on tax evasion, with the introduction of a range of anti-avoidance measures
that will give even more power to HM Revenue & Customs.
Mr Darling could also announce further alterations to the planned shake-up of
both capital gains tax (CGT) and the way in which non-domiciles are taxed.
The changes that the Chancellor made in the Pre-Budget Report last October
were criticised widely.
Rich pickings
It is not just the Treasury's plans on capital gains tax that have stirred
debate since they were announced in October.
The Chancellor's plan to tax non-UK domiciles has also been controversial.
At the moment, non-UK residents who are working in this country pay tax here
on their earnings in this country but not on any of their non-UK income.
This means that billionaires, such as Roman Abramovich, are able to live in
Britain while paying no UK tax on their overseas fortunes.
Andrew Jupp, of Tenon Group, the accountant, says: “What the Chancellor is
proposing is that non-doms who have lived in the UK for more than seven
years will be taxed on their worldwide earnings, rather than just those in
this country, or have to pay an annual charge of £30,000.”
For non-doms who have worked in the UK for ten of the past twelve years, this
charge could rise to £50,000.
Labour + Tax Increase = MORE WASTE.
steve tea, manchester, cheshire