What the right hand giveth…
From 6 April 2008, the basic rate of income tax will be reduced from 22% to 20%. To counteract the loss in revenue, the Chancellor announced that the starting rate of 10% will be abolished for earnings and pensions but will be retained for savings and gains.
In effect, everyone will start paying the basic 20% tax rate sooner. According to the Treasury, abolishing the 10% rate means income tax receipts will jump by £7.3bn from April next year, largely offsetting the forecast £8bn cost of reducing the basic rate.
In relation to NI contributions, for 2008/09, the upper earnings limit for Class 1 NI contributions will be aligned with the new point at which higher rate income tax will become payable after personal allowances have been taken into account. Alignment of the income tax and NI rates will be achieved for subsequent years through a proposed NICs Programme Bill, with an April 2009 start date.
The Chancellor has already raised NI contributions by a tenth to 11% for most people (with the introduction of the additional 1% NI charge on all earnings above the upper earnings limit). The Treasury forecasts that making NICs more like income tax will raise receipts by nearly £1.5bn by 2009.
The threshold for 40% tax will rise to £34,600 in excess of personal allowances from next month. Mr Brown said that, by 2009, it will be possible to earn £43,000 before paying 40% tax. But aligning NICs with income tax means anyone earning £43,000 a year or more will pay more in additional NICs than they save from the threshold for higher rate income tax being raised.
If you would like further information on this issue, please contact Guy Abbiss
, Tracey Horne
or Colin Kendon