Will You Be Richer This Tax Year?

There's been an income tax cut! Are you better or worse off this new tax year?

The start of a new tax year doesn't really give you the same cause for celebration as the start of a new calendar year. I don't suppose you heard many champagne corks popping as the clock struck midnight on April 5 to herald in the financial year of 2008 to 2009.  

But the new tax year brings with it a raft of changes which could affect your wealth. Even if you think the whole topic of tax is a little dry, it's good to know all the same. So, here goes with a round-up of the main changes that have kicked in this tax year.

Income Tax

The dreaded income tax takes a nasty bite out of your earnings every month. Luckily you don't have to pay any tax on your personal allowance - and as of April 6th, this allowance has increased from £5,225 to £5,435, for those of us who are under 65.

If you're over 65, you'll enjoy an even more generous allowance of £9,030* up from £7,550 while the over 75s will see an increase to £9,180 from £7,690.

Income earned above the personal allowance is now taxed at the following rates:

The 10% starting rate (which used to apply to the first £2,230 of taxable income) has now been abolished on earnings,** while the basic rate of tax has been reduced from 22% to 20%.

But what does this mean for you?

Let's say you earn £25,000 and you're under 65. The first £5,435 is tax-free, as that's your personal allowance. The next £19,565 will be taxed at 20%, meaning £3,913 will be deducted from you salary over the year.

Under the old rates, you would have paid £4,083 in income tax. So, you'll be £170 better off this year.

But how well you do out of the new tax rates depends on your earnings. The abolition of the 10% starting rate will hit low earners the hardest. In fact, if you have an income of £10,000, you'll actually find yourself around £130 worse off this tax year.

National Insurance Contributions (NICs)

Don't forget as well as income tax, NICs will usually take a slice out of your salary too. You'll only have to pay NICs if you earn at least £105 per week, up from £100 per week. The rate stays the same at 11% of earnings between £105 and the upper earnings limit (UEL). The UEL has increased significantly from £670 per week to £770. Above the UEL, NICs are payable at a rate of 1%.

This means if you earn between £34,480 and £40,040 you'll have to pay NICs at the higher rate of 11%, rather than the 1% rate which was payable on earnings over £34,480 last tax year.

So if you earn £40,040, you will find you'll pay a massive £491 more in NICs this tax year.

However, the reduction in the basic rate of income tax should more than make up for this, cutting your income tax bill by a whopping £509. So overall, you will actually be around £18 better off.

Capital Gains Tax (CGT)

CGT is a tax paid on any money you make when you sell or give away an asset. You don't normally have to pay CGT on the sale of your home or personal belongings which are individually worth up to £6,000.

You also qualify for an annual exemption which this tax year has risen by £400 to £9,600. In other words, you can make gains of up to £9,600 this tax year and pay no CGT.

Last tax year, any amount chargeable to CGT would have been added on top of your income. CGT would have been payable at a rate of 10%, 20% or 40%, determined by your income tax bracket. But this has now been replaced with a flat rate of 18%. So you'll win or lose out, depending on the level of CGT you would have paid before.

If you make a loss on an asset which you would normally pay CGT on, then this can offset your overall liability.

Indexation and taper relief which helped to reduce your CGT bill are now a thing of the past too.

Inheritance Tax (IHT)

This was recently found to be the tax we love to hate more than any other. When someone dies, the unpopular IHT is levied on the value of their estate that is worth more than the `nil rate band'.

This tax year, the nil rate band allowance is rising from £300,000 to £312,000. So if an estate is worth less than £312,000 it will be free of IHT. Otherwise it will charged at staggering rate of 40% on the amount over £312,000 (i.e. the first £312,000 will still be IHT-free).  

Everyone is entitled to a nil rate band allowance but, as of this tax year, this allowance is now easily transferable between spouses and civil partners. Bereaved widows, widowers and civil partners can combine their allowances to make it easier to shelter up to £624,000 of assets from IHT.  

It has always been possible for couples to combine nil rate bands but only through a complex will and trust arrangement. The new rules make this process more straightforward than before.

Investments

If you like tax-free investments - and who doesn't - you'll be pleased the ISA limits have been raised to £7,200 overall, up from £7,000 last tax year. Savings in cash ISAs have increased from £3,000 to £3,600. Some argue the limits should be raised even further, but I suppose every little helps.

There ends my round-up. I hope that wasn't too painful. Because let's face it, there's rarely good news when it comes tax - and that especially holds true for low earners this year. For most people, however, it's a case of swings and roundabouts, where you'll gain from some of the changes but lose out from others. But one thing is for sure: no matter what the rates, tax still hurts!

*If your income is over the 'income limit' of £21,800, the age-related allowance reduces by half of the amount (£1 for every £2) you have over the limit, until the basic rate allowance is reached (you'll always get the basic allowance, whatever the level of your income). So if, for example, you're 66 and you have an income of £22,300 (£500 over the limit) your age-related allowance would reduce by £250 to £8,780.

**The 10% starting rate still applies to savings income of less than £2,320 in the tax year. Dividend income from shares is still taxed at 10% unless you're a higher rate taxpayer when you pay 32.5% on the higher rate element.

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