Looking back at the Budget
This year’s Budget was unusual in two respects. It was the last to be presented by Gordon Brown and it gave a picture of our tax system not just for the current tax year but set out some principles which will not be fully in place until 2009/10.
To get from where we are now to the revised tax system involves a number of complex changes which are being introduced in different tax years. However by 2009/10 the key part of the changes is the alignment of the income tax and National Insurance (NI) bands.
The starting rate band on earned income disappears, the basic rate of income tax falls to 20% but the amount of NI payable goes up for many due to the jump in upper earnings limit so that this limit is aligned with the point at which higher rate tax is payable.
So considering income tax and NI together on employment income, there would be three effective tax rates:
- 0% on income up to the personal allowance
- 31% (20% income tax and 11% NI) on income in the basic rate band
- 41% (40% income tax and 1% NI) for higher rate taxpayers.
The self employed will pay Class 4 contributions at 8% on the profits falling within the basic rate band so their tax rates are 0%, 28% and 41%.
Do these changes mean you are better or worse off? The answer for many is that there will be little difference in the overall tax and NI bills. Broadly what has been saved in income tax will be taken back again in increased NI.
There the simplification ends because if your main income consists of interest or dividend income, the starting rate band remains and the tax rates will be:
| Tax Year 2009/10 |
Bands (ignoring inflation)
|
Tax Rates
|
|
Interest
|
Dividends
|
| Personal allowance |
5,225 |
0% |
10% |
| Starting rate band |
2,230 |
10% |
10% |
| Basic rate band |
38,395* |
20% |
10% |
| Higher rates start at: |
40,625* |
40% |
32.5% |
*Estimated from changes announced to NI bandings
|
So taxpayers with little earned income end up paying no NI and less tax than taxpayers with earned income. This is a rather strange conclusion for those with long memories as in times gone by the tax system charged investment income to a surcharge.
The Budget also gave us significant changes to corporation tax rates with profits of up to £300,000 already increased to 20%, and set to rise again in April 2008 to 21%, and once more in 2009 to 22%.