Budget 2008

 

Income Tax

 

From 6th April 2008 the 10% starting rate for income tax is abolished on earned income but will remain for savings income.

The basic rate of income tax will be reduced from 22% to 20%.

Age-related personal allowances (65-74 and 75+) will be increased by inflation plus an additional £1,180. The 40% higher rate remains, as do the 10% and 32.5% dividend rates.

The basic rate of 20% will be payable up to the limit of £36,000.

For calculating rates of tax the first slice of an individual’s income is non-savings income (earnings, pensions, taxable social security benefits, trading profits, income from property). The next slice is savings income (bank and building society interest). Dividend income is the top slice.

Accordingly the starting rate limit for savings income will be £2,320 – if non savings income exceeds this figure then the starting rate will not be available for savings income. In this case, savings income would be taxed at 20% up to £36,000. However, if non-savings income is less than the starting rate for savings limit, then the savings income will be taxable at 10% up to £2,320. So if an individual has £1500 earned income (over and above the personal allowance) then he/she can have the additional £820 (savings limit of £2,320 less £1500) taxed at 10%, as well as the first £1500.

 

National Insurance Contributions (NICs)

 

The threshold of earnings above which individuals pay NICs (the Upper Earnings Limit) will increase by £75 above indexation from 6 April 2008. Then from 2009/10 the Upper Earnings Limit will be aligned with the increased level at which higher rate tax becomes payable.  This obviously means that directors and employees need to revisit how they take their remuneration (dividends v salary v pensions)

 

Corporate Tax

 

Profits limits are unchanged.

 

Small Companies’ Rates

From 1 April 2008 the small companies’ rate of Corporation Tax will increase from 20% to 21% (ring fence profits remain liable at 19%).

The fraction for smoothing between the main and small companies’ rates will be 7/400 (11/400 for ring fence profits).

 

Main Rates

The main rate of Corporation Tax will be 28% (30% for ring fence profits) from 1 April 2008.

 

Capital Gains Tax

 

A new single rate of CGT of 18% for individuals, trustees and personal representatives on disposals made on or after 6 April 2008, that exceed the annual allowance, has been introduced, confirming the Pre-Budget proposals.

 

Disposals made on or after 6 April 2008 will not benefit from taper relief or indexation relief (although please note that companies will still be eligible for indexation relief). However, other CGT reliefs will continue to be available:

• Private Residence Relief

• Business Asset roll-over relief

• Current reliefs related with ‘The Enterprise Investment Schemes’ (EIS) and ‘Venture Capital Trusts’     

    (VCT) –  with the exception of taper relief as above.

• Unused allowable losses from past years will continue to be allowed to be brought forward in order to reduce

    any  gains.

 

There will be a new Entrepreneurs’ relief available on certain assets which will give an individual a ‘lifetime’ total of £1 million of qualifying gains at a reduced CGT rate of 10%. Gains in excess of £1m will be charged at 18%. This new relief will be effective for qualifying disposals on or after 6 April 2008 – disposals on or before 5 April do not affect the lifetime limit.

 

Gains qualifying for Entrepreneurs Relief will be gains made by individuals on the disposal of:-

  • all or part of a trading business (trade, profession or vocation including commercial letting of furnished UK holiday accommodation but not other types of property letting) carried on by the individual alone or in partnership (provided he/she owned the business throughout the one year period prior to disposal)
  • assets of the trading business following cessation of the business (which were in use at the time of cessation and are disposed of within 3 years following cessation)
  • shares in (and securities of) the individual’s ‘personal’ trading company (or holding company of a trading group) – provided that throughout a one-year qualifying period the individual is an officer or employee of the company and owns at least 5% of the ordinary share capital, with at least 5% of the voting rights)
  • assets owned by the individual and used by his/her ‘personal’ trading company (or group) or trading partnership.

 

Individual Savings Accounts (ISAs)

 

6th April 2008 will bring changes to the ISA rules, when the annual allowance will be raised to £7,200. Up to £3,600 can be invested in a cash ISA and the balance in a stocks and shares ISA with the same, or a different provider. So, for example, if an individual invests £2,000 in a cash ISA, he/she could then invest £5,200 in a stocks and shares ISA. Any UK resident or ordinarily resident individual can invest in an ISA (individuals must be over 16 to have a cash ISA and over 18 to have a stocks and shares ISA). The terms ‘maxi’ and ‘mini’ ISA will disappear. Investment can be made by a lump sum, a regular or an irregular payment.

 

Current mini stocks and shares ISAs – and the stocks and shares part of maxi ISAs will automatically become stocks and shares ISAs. Current mini cash ISAs, TOISAs and the cash part of maxi ISAs will automatically become cash ISAs. All Personal Equity Plans (PEPs) will also automatically become stocks and shares ISAs and will be able to invest in the full range of ISA investments, including insurance and stakeholder products. It will be possible to merge these with your existing stocks and shares ISA if required.

 

It will also be possible to transfer some or all of the monies saved in a cash ISA (including a TOISA) into a stocks and shares ISA – but not vice versa. If an investor transfers ISA cash monies from a previous tax year, this will not affect his/her current annual ISA allowance.

 

Investors can also transfer monies saved in the current year but this must be the whole amount. Provided an investor has not used up the whole of their £7,200 annual allowance he/she can then make further payments. If an individual invested £1,000 in a cash ISA in 2008/9 and then transferred this to a stocks and shares ISA, they would still be able to invest an additional £6,200 – this could be split £3,600 into cash and £2,600 into stocks and shares or all in stocks and shares – when an investor transfers a current year’s cash ISA into a stocks and shares ISA, it is as if the original cash ISA investment was never made.

 

It is also possible to transfer cash ISAs between providers and stocks and shares ISAs between providers. These must be done direct between the providers – otherwise it will count towards the current annual allowance.

 

Please note that, although there is no personal income or capital gains tax on any ISA investment, tax of 20% must be deducted from any interest earned on un-invested cash within a stocks and shares ISA before it is paid out (and this will also now apply to former PEPs).

 

 

 

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