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.
Some basic rate taxpayers may now lose out due to
the withdrawal of the starting rate for non savings income. There may also be a
significant sting in the tail for some 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 65s 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 child. 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 with very low income but
the higher rate of taper will eat away at that advantage for those with higher
income. |
Individual Savings Accounts (ISAs)
Over the last year the government has finalised the
changes to ISAs 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. The 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
ISAs in each tax year; a cash ISA and a stocks and shares ISA. Mini and maxi
ISAs will no longer exist.
- Mini cash ISAs, TESSA-only ISAs and the cash
component of a maxi ISA will automatically become cash ISAs.
- Mini stocks and shares ISAs and the stocks and
shares component of a maxi ISA will automatically become stocks and shares
ISAs.
- All Personal Equity Plans (PEPs) will automatically
become stocks and shares ISAs.
- ISA savers will be able to transfer money saved in
their cash ISA to their stocks and shares ISA.
Comment
Existing
ISAs and PEPs will automatically convert into cash or stocks and shares ISAs.
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 ISAs and
will now apply to interest earned on un-invested cash formerly held in
PEPs. |
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, 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. |
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.
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