Tax Cut Or Tax Con?

The Chancellor of the Exchequer surprised most of us with his plans for taxing us in the future. But what about now?

As we all know, the Chancellor of the Exchequer ended his leadership campaign speech (oops, I mean Budget speech) in the House of Commons this week with a bit of a flourish when he made the surprise announcement that he would be cutting the basic rate of income tax from 22 pence in the pound to 20p.

He will finance the vast majority of it by abolishing the lower starting tax rate of 10p and changing the thresholds for paying National Insurance. Even Brown has admitted that all he's done is shuffle around the money leaving different groups of people better or worse off.

And, of course, none of it will happen until April 2008.

Until then, we will not be able to take advantage of the proposed rise in ISA contributions - increased from £7,000 a year to £7,200 with the cash element of it being upped by £600 to £3,600. And while it's welcome news that the inheritance tax threshold will be increased in stages to £350,000, this figure will not be reached until the 2010-11 tax year.

The Chancellor may have joked in his speech that it was not sensible for any Prime Minister to hold the job of Chancellor simultaneously but he has managed -- if he wins his leadership campaign -- to commit his future Chancellor to a budget that won't come to fruition for the next three or four years.

Anyway, perhaps it would be more useful to concentrate on what will happen in the immediate future since that will affect us all now. The key points for the 2007-08 tax year look like this:

Income Tax - For the year 2007-08, you are allowed to earn in the following accumulative order:
£5,225 (free of tax), then:
£2,230 (@ the rate of 10%), then;
£2,231 - 34,600 (@ the rate of 22%), then;
£34,601 + (@the rate of 40%)

In other words, coupled with your initial tax-free personal allowance, you can currently earn up to £39,825 a year before you end up in the higher rate tax bracket. Pensioners get a higher initial tax-free allowance and anyone with young children will get increased rates of child tax credit, child benefit and working tax credit (the latter, if you're a working parent).

The Vices - If you like the odd pint or glass of wine then you can look forward to paying extra tax with effect from Monday as follows:
Beer - 1p per pint
Wine - 5p per 75cl bottle
Sparkling wine - 7p per 75cl bottle

And if you smoke, then you'll be paying an extra 11 pence in duty on a packet of 20 cigarettes. If you want to give up before smoking is banned in public places on 1st July, then you can buy all the nicotine patches and anti-smoking aids you need at a reduced rate of VAT (5% instead of 17.5%).

Cars - If you drive a large 4 x 4 vehicle (or 'gas guzzler' as some people like to call them), your road tax will go up to £300 a year immediately. Anyone driving smaller, more fuel-efficient cars can look forward to a road tax bill of less than £50. Fuel will also go up by 2p a litre -- but with a six month delay so the rise doesn't take effect until 1st October.

Inheritance Tax - If you die in the 2007-08 tax year, you can leave an estate worth up to £300,000 before your heirs get taxed at 40% on the remainder

Capital Gains Tax - If you sell assets or property at a profit, you can offset £9,200 of it before you need to think about paying tax. If you co-own the property with anyone, each of you is entitled to offset £9,200 before splitting the proceeds.

You can have a go at working out what your own situation will be by using KPMG's Budget calculator which should give you a rough idea of whether you'll be worse or better off following the Chancellor's Budget this week!