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Where did the Budget leave you?
This year’s Budget – Gordon Brown’s finalé as Chancellor – was a shocker. It was not until the very end that the Chancellor produced a rabbit from the hat in the form of a surprise 2% cut in the basic rate of tax. However, the tax cut was not all it seemed.HM Revenue & Customs issued 81 sets of Budget Notes after the Chancellor sat down, and it was in these that the detail of the Chancellor’s proposals could be found. Predictably, much had been unmentioned in the Budget speech.
Income Tax and National Insurance Contributions
The headline-grabbing 2% cut in the basic rate of income tax to 20% will not take effect until next tax year – after 5 April 2008. What is more, the Chancellor announced two changes that will mean that some taxpayers will lose out:
• The 10% income tax band (covering the first £2,230 of your taxable income in 2007/08) will no longer reduce the tax burden on your earnings or pension income in 2008/09. The 10% rate will still cover savings income (eg deposit interest), but very few people will see any of their income taxed at 10% because savings income is only taxed after earnings and pensions.
• Some people will pay national insurance contributions on much more of their earnings. The increase will be introduced over the next two years. By 2009/10, you will be paying the full rate of NICs on roughly the first £43,000 of earnings compared to only £34,840 this year. The full rate of NICs is 11% or 9.4% for employees and 8% for the self employed.
Small Companies and Corporation Tax
Small companies will now pay more tax on their profits. The corporation tax rate for companies with profits of up to £300,000 has been increased by 1% to 20% from April 2007. It will rise by a further 1% in 2008 and again in 2009, when it will be 22%. If you have a small company, it is almost certainly still worth paying yourself in the form of dividends rather than salary, but the advantage is less than it was. The flip side of higher corporation tax is that your company’s pension contributions will now benefit from more tax relief.
Pensions Term Assurance
Tax Relief for new individual pension life cover policies has been withdrawn in another government pension U-turn. So if you have an existing personal pension term policy where the premiums qualify for full tax relief, you should think very carefully before cancelling it. The removal of tax relief only applies to personally paid premiums on individual policies. Employers continue to receive tax relief on their premiums to provide group life cover for employees, so the value of this particular employee benefit has effectively been increased.
Individual Savings Accounts
You will be able to invest slightly more into your ISA each year. The Budget announced an increase, but only by £200, and then not until April 2008. Of the £7,200, up to £3,600 may be invested in a cash ISA. For the current 2007/08 tax year, the limits remain at £3,000 for a cash ISA or £7,000 for a stocks and shares ISA. The overall annual ISA limit will stay at £7,000. If there is a single lesson to be drawn from the Budget, it is that genuine tax cuts are not on the agenda. What the Chancellor has given with one hand, he has taken with the other. If you want to cut your tax bill, look to your own financial planning, not generosity from HM Treasury. Remember that tax rules can and do change and you need to plan in the light of your own individual circumstances. The FSA does not regulate tax advice.