TT106: Tax Threshold Changes

November 23, 2007

Little and large

Usually tax allowances and National Insurance (NIC) rates for the coming tax year are published with the Chancellor’s Autumn Statement. However this year, in a break with tradition, the Government stated that the rates for 2008/09 would not be published until the retail price index for September 2007 had become available.

Previous announcements had stated that for 2008/09 age-related personal allowances would be increased by £1,180 above inflation; that the 10% rate of income tax would be abolished for earnings and pension income (with the basic rate of income tax becoming 20%); that the basic rate band for income tax would only increase by inflation and the upper earnings limit for NIC would increase by £75 per week above inflation.

The rates were eventually announced in October and the increase in the personal allowance is just £210, taking it to £5,435. However, the really bad news is there is a large NIC band increase with the lower earnings limit for employees (the effective nil rate band for NIC) being raised by a small £5 per week to £105, while the upper earnings limit (the rate up to which employees pay NIC at 11%) rises by a huge £100 per week to £770. Employees earning over £34,840 (in the current year) will thus see a significant increase in their NIC bill for 2008/09. This means that for an employee earning in excess of £40,040 they will pay £520 more NIC under the new rates.

As summary of the key rates is below:

Income tax

£ per year (unless stated)
Income tax personal and age-related allowances
2007-08 Change 2008-09
Personal allowance (age under 65) £5,225 +£210 £5,435
Personal allowance (age 65-74) £7,550 +£1,480 £9,030
Personal allowance (age 75 and over) £7,690 +£1,490 £9,180
Married couple’s allowance*
(aged less than 75 and born before 6th April 1935)
£6,285 +£250 £6,535
Married couple’s allowance* (age 75 and over) £6,365 +£260 £6,625
Married couple’s allowance* – minimum amount £2,440 +£100 £2,540

*Married couple’s allowance is given at the rate of 10 per cent.

National insurance contributions

£ per week (unless stated) 2007-08 Change 2008-09
Lower earnings limit, primary Class 1 £87 +£3 £90
Upper earnings limit, primary Class 1 £670 +£100 £770
Primary threshold £100 +£5 £105
Secondary threshold £100 +£5 £105
Employees’ primary Class 1 rate
between primary threshold and upper earnings limit
11% 11%
Employees’ primary Class 1 rate
above upper earnings limit
1% 1%
Employers’ secondary Class 1 rate
above secondary threshold
12.8% 12.8%
Class 2 rate (per week) £2.20 +£0.10 £2.30
Class 4 lower profits limit £5,225 per year +£210 £5,435 per year
Class 4 upper profits limit £34,840 per year +£5,200 £40,040 per year
Class 4 rate between lower profits limit
and upper profits limit
8% 8%
Class 4 rate above upper profits limit 1% 1%

Summary

The forthcoming reduction in the basic rate of tax to 20% for 2008/09 will largely be offset for most people by the loss on the 10% rate of tax on earned income and the large hike in the threshold for the payment of NIC at the full rate

This increase will continue in 2009/10

Stop Press

It has become apparent that many more people than the Government expected will be affected by the increase in the rate of Capital Gains Tax to 18% on business assets (see Topical Tip 104). Please ensure you seek advice from your Barnes Roffe LLP partner at the earliest opportunity to see what the impact may be on your circumstances and to discuss your possible options.

Barnes Roffe Topical Tips:

Consult your Barnes Roffe LLP contact Partner for guidance in this important area.

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