Budget Overview March 2007
Income Tax
With effect 6 April 2008 the basic rate of income tax will reduce from 22% to 20%. The 10% starting rate of tax will be abolished but only for earned income and pensions. It will still be available for savings income and capital gains tax.
Removing the 10% tax rate for pensions will mean a reduction in the tax relief available on pension contributions by basic rate taxpayers.
Individuals who want their gross payments to stay at the level they are currently will need to increase the amount they pay from next year.
The usual inflationary increases will apply for 2007/08, as detailed below:
Income Tax Allowances 2007/08
Single Personal Allowance (under 65) £5,225
Single Personal Allowance (aged 65-74) £7,550
Single Personal Allowance (aged 75 and over) £7,690
Income Limit for Age Related Allowances £20,900
Married Couple’s Allowance
(aged 75 and over) £6,365
Minimum Married Couple’s Allowance £2,440
Blind Person’s Allowance £1,730
Income Tax Rates For Individuals
The income tax bands for the 2007/08 tax year will be as follows:
£0 - £2,230 10%
£2,231 - £34,601 22%
£34,601 + 40%
The higher rate income tax threshold will increase quite significantly to £43,000 in April 2009.
National Insurance Contributions
The revised limits are as follows:
Class 1 Employee (Contracted In To The State Second Pension (S2P))
Employee Employer
No NIC on first £100 pw £100 pw
Lower earnings limit £87 pw
Upper earnings limit £670 pw No Limit
1% NIC on earnings over £670 pw N/A
Self-employed (if earnings are over £4,465 pa)
Class 2 (Flat rate) £2.20 pw
Class 4 (On profits between £5,225 - £34,840 pa) 8%
Class 4 (On Profits over £34,840 pa) 1%
Voluntary Class 3 (Flat Rate) £7.80 pw
Inheritance Tax
The nil rate band will be increased to £300,00 in 2007/08, slightly higher than statutory indexation.
This will again increase to £312,00 in 2008/09, £325,000 in 2009/10, and to £350,000 in 210/11. According to the Treasury, they estimate that the number of estates in 2006/07 liable to pay Inheritance Tax will be around 6 in 100.
Estate Value 2007/08
£0 - £300,000 0%
Over £300,000 40%
Capital Gains Tax
The annual exemption be increased in line with statutory indexation to £9,200 for 2007/08. The exemption for most trusts will be £4,600.
Stamp Duty Land Tax
There will be no changes to the thresholds for Stamp Duty.
Company Car Benefits
From 6 April 2008 there will be a 2% discount to the tax payable on company cars running on E85 fuel. E85 fuel generally uses ethanol and not petrol.
Vehicle Road Tax
Vehicle Excise Duty will increase drastically to £400 for the largest and most polluting cars. However, those cars causing the least pollution will see a further reduction of 30% in the cost of a licence.
Individual Savings Accounts
The current annual limits will remain the same for 2007/08 but will increase in 2008/09, as follows:
Mini ISA Limits Cash Mini ISA Stocks and Shares Mini ISA
2007/08 £3,000 £4,000
Maxi ISA Limits Cash Component Stocks and Shares Component
2007/08 £3,000 Balance up to £7,000
Overall Limit Cash Component Overall Limit
2008/09 £3,600 £7,200
Additional changes to ISA’s are proposed from 6 April 2008, as follows:
There will be no distinction between mini and maxi ISA’s
Investors will be able to transfer previous year’s cash ISA’s to stocks and shares
PEPs will be brought within the ISA wrapper
The Child Trust Fund can be rolled over into an ISA when the child reaches 18.
State Pensions
State Pension 2007/08
Single Person £87.30 pw
Dependent’s addition £52.30 pw
Total married pension £139.60 pw
Financial Assistance Scheme
The Financial Assistance Scheme (FAS) helps pension scheme members that lost out in terms of pension benefits when their employer became insolvent.
The Government has been criticised because the money set aside would mean people affected receiving little or no compensation. The £2 billion set aside was simply not enough. However, the budget for the Financial Assistance Scheme is to be increased to £8 billion, meaning that all scheme members who lost out will get a payment.
Pension Term Assurance
The ‘will they – won’t they’ Pensions Term Assurance argument has finally been settled.
Tax relief will no longer be available for contributions made on or after 1 August 2007 under occupational pension schemes in respect of PTA policies, unless the insurer received the policy application before 29 March 2007 and the policy was taken out before 1 August 2007.
Tax relief will no longer be available for contributions made on or after 6 April 2007 in respect of Pension Term Assurance policies, unless the insurance company received the application form before 14 December 2006 and the policy was put into force before 6 April 2007.
Tax relief on premiums for policies will stop if the policy is varied, in terms of increasing the sum assured or extending the term. This is not the case if the variation is a result of an option within the policy.
Alternatively Secured Pensions
The minimum income that must be taken has now been reset to 55% of the annual amount of an annuity for a 75 year old.
The inheritance tax rules are being amended where the pension fund is passed to another member of the scheme following the member’s death.
Such payments will be treated as an unauthorised payment, subjecting the capital to a total charge of 70%. IHT will also be applicable to the value.
The Government wants to make sure that the overall charges to inheritance tax are the same, whether they are deducted before or after any unauthorised payment charge payable by the scheme. Currently the charges differ, depending when they are paid.
Where a pension scheme member could not be traced and they had reached age 75, HM Revenue & Customs had said the member would be deemed to enter Alternatively Secured Pension. However, this will not now be the case and the unclaimed pension fund will be held separately.
If the member is subsequently found after the age of 75 they will have six months to choose to purchase an annuity or enter Alternatively Secured Pension. In the event no choice is made, the member will be deemed to be in ASP and will receive the minimum income allowed.
The intention of the ASP changes is to make it unattractive, except for those with religious objections to annuities.
Life Insurance Policies and Commission
The rules on chargeable gains are changing. The person liable to pay tax on any gain will have to add the amount of any rebated commission to the gains reported on the chargeable event certificate (produced by the insurer) to give a total amount to be included on their self-assessment return.