There has been a lot of publicity about the announcement that the government propose to reduce the basic rate of income tax from 22% to 20%. This change is due to take effect from 2008/09 and not from 6 April 2007.
The proposal is to radically change the tax rates for 2008/09 onwards when the 10% starting rate will be abolished for earned and pensions income and the 22% basic rate of tax will be reduced to 20%. The higher rate of tax will continue at 40%.
The starting rate will continue to be available for savings and investment income and capital gains. There are no changes to the tax rates applicable to dividends.
He also announced that the point at which people start paying the higher rate of tax will be increased significantly to £43,000 from 2009/10.
Not all good news watch the national insurance (NI)
There is, however, a significant sting in the tail for those with earned income. For 2007/08 there is no change in the rates of NI but there are significant proposed changes to the limits between which NI contributions are payable. For 2007/08 the lower and upper earnings limits (UEL) increase by inflation so that employees will pay 11% NI on earnings between £100 and £670 per week. Employees continue to pay contributions of 1% on earnings above the UEL. For 2008/09 the UEL will be increased by £75 per week above indexation.
The upper profits limit for Class 4 NI for the self-employed will also be increased in 2008/09 by £75 per week above indexation.
In 2009/10 UEL will be aligned with the point at which the higher rate of income tax becomes payable.
The government claims the increases in national insurance are aimed at simplifying the tax system but it comes at quite a cost to employees and the self-employed.
Internet link: Treasury press notices