As the Government confirms tax rates and national insurance contributions for 2008-09, we take a look at those who will benefit from the changes and those who won't.
I know tax can be a pretty tedious subject at the best of times so I'll attempt to make this as painless as possible! As tax rates for 2008-09 are announced by the Government, will you be better or worse off in the new tax year?
Personal Allowances
Firstly, let's take a look at personal allowances. Your personal allowance enables you to earn the first slice of your income completely free from income tax. For the 2008-09 tax year the allowance will rise by £210 to £5,435.
The silver generation will enjoy a more generous uplift with an age-related allowance of £9,030 for people aged between 65 and 74 and £9,180 for those aged 75 and over. This means everyone aged 65 and over will benefit from a tax-free income of up to £173 a week as long as they earn below the income limit for age-related allowances which next year will be raised to £21,800 (there's a reduction of £1 for every £2 of income over this limit, but you'll never get less than the basic allowance of £5,435.) According to the Government these allowances will allow half of all pensioners to side step income tax entirely.
The table below outlines the main changes that will take place on 6th April 2008:
Income tax personal and age-related allowances | 2007-08 | Change | 2008-09 |
|---|---|---|---|
Personal allowance (age under 65) | £5,225 | +£210 | £5,435 |
Personal allowance (age 65-74) | £7,550 | +£1,480 | £9,030 |
Personal allowance (age 75 and over) | £7,690 | +£1,490 | £9,180 |
Married couple's allowance* (aged less than 75 and born before 6th April 1935) | £6,285 | +£250 | £6,535 |
Married couple's allowance* (age 75 and over) | £6,365 | +£260 | £6,625 |
Married couple's allowance* - minimum amount | £2,440 | +£100 | £2,540 |
Income limit for age-related allowances | £20,900 | +£900 | £21,800 |
Blind person's allowance | £1,730 | +£70 | £1,800 |
*Married couple's allowance is given at the rate of 10 per cent.
The new tax year will also see the abolition of the 10% starting rate of income tax for earned income and pensions. This means the first taxable portion of your income will be paid at the basic rate which is set to reduce from 22% to 20%.
But remember, while a tax reduction may seem beneficial, on the other side of the coin, the lower rate will also apply to your pension contributions. At current rates, if you're a basic rate taxpayer and you make a contribution of £78 into your pension scheme you will receive tax relief at the basic rate of 22%, meaning your grossed-up contribution will total £100. However, in 2008-09 you'll need to pay £80 to receive an equivalent overall contribution.
The taxable bands for 2008-09 won't be known until the Budget Report next March but, as a quick reminder, here are the current income tax rates:
Taxable Bands Allowances | 2007-08 |
|---|---|
Starting rate 10% | £0 - £2,230 |
Basic rate 22% | £2,231 - £34,600 |
Higher rate 40% | over £34,600 |
Once the 10% starting rate has disappeared, you'll end up paying £223 more on the first taxable portion of your income, although for earnings above the personal allowance basic rate, tax at the lower level of 20% will apply.
So let's take a look at how these new rates will work in practice. Let's say you're under 65 and you receive an income of £25,000 - how will your income be affected?
Tax Year | 2007-08 | Tax Year | 2008-09 |
|---|---|---|---|
Gross Income | £25,000 | Gross Income | £25,000 |
Personal Tax-Free Allowance | £5,225 | Personal Tax-Free Allowance | £5,435 |
Taxable Amount | £19,775 | Taxable Amount | £19,565 |
Next £2,230 @ Starting Rate 10% | £223.00 | Starting Rate 10% Abolished | £0.00 |
Next £17,545 @ Basic Rate 22% | £3,859.90 | Next £19,565 @ Basic Rate 20% | £3,913.00 |
Total Tax Payable | £4,082.90 | Total Tax Payable | £3,913.00 |
Happily in this scenario you'll be £169.90 better off next year. Now let's assume you're a lower earner with an income of £10,000:
Tax Year | 2007-08 | Tax Year | 2008-09 |
|---|---|---|---|
Gross Income | £10,000 | Gross Income | £10,000 |
Personal Tax-Free Allowance | £5,225 | Personal Tax-Free Allowance | £5,435 |
Taxable Amount | £4,775 | Taxable Amount | £4,565 |
Next £2,230 @ Starting Rate 10% | £223.00 | Starting Rate 10% Abolished | £0.00 |
Next £2,545 @ Basic Rate 22% | £559.90 | Next £4,565 @ Basic Rate 20% | £913.00 |
Total Tax Payable | £782.90 | Total Tax Payable | £913.00 |
As a lower earner you will, in fact, find yourself in a worse position because your tax bill will rise by more than £130. If the calculations are done again but this time based on earnings of £16,000 then the difference between your current and new tax liabilitiy is marginal at just over £10. Generally speaking, the new rates will be detrimental to those with earnings below that level as a greater proportion of their income will attract tax at 20%. Meanwhile those earning in excess of £16,000 are likely to benefit from the 2008-09 tax rates.
National Insurance Contributions
Now let's consider national insurance contributions (NICs). The threshold beyond which NICs are payable will increase from £100 to £105 per week. NICs won't be payable below this amount. The rates will remain unchanged at 11% of earnings between the primary threshold and the upper earnings limit (UEL) and 1% above the UEL.
The table below outlines the key changes for employed people:
£ per week | 2007-08 | Change | 2008-09 |
|---|---|---|---|
Lower earnings limit, primary Class 1 | £87 | +£3 | £90 |
Upper earnings limit, primary Class 1 | £670 | +£100 | £770 |
Primary threshold | £100 | +£5 | £105 |
Secondary threshold | £100 | +£5 | £105 |
Employees' primary Class 1 rate between primary threshold and upper earnings limit | 11% | - | 11% |
Employees' primary Class 1 rate above upper earnings limit | 1% | - | 1% |
As you can see the UEL will increase dramatically from £670 to £770 per week. This will mean people earning between £34,840 and £40,040 will have to pay NICs at the higher rate of 11% rather than the 1% rate which is currently payable on earnings over £34,840. People earning around £34,840 are likely to benefit most from the new tax rates as a greater proportion of their income will be taxed at the lower basic rate of 20% while their NICs will remain the same.
So there you have it. A brief summary of how the main tax rates are likely to affect you in 2008-09. If you'd like to look at the full range of changes go to Income tax allowances, National Insurance contributions, Child and Working Tax Credit rates 2008-09 and other rates.