Taxing times ahead

What the numbers really mean

The combined effect of removing the 10 per cent band of income tax for earned income and pensions, while increasing National Insurance contributions (NICs) so that employees earning up to £43,000 a year will pay 11 per cent NICs, will more than off-set the 2p income tax reduction.

At the other end of the income scale, the threshold for 40 per cent tax increased to £34,600 in excess of personal allowances from 6 April 2007.

But the alignment of NICs with income tax means that anyone earning £43,000 a year or more could pay more in additional NICs than they save from the 40 per cent threshold being raised.

The Chancellor promised to remove 600,000 pensioners from having to pay any income tax. Previously, people aged between 65 and 74 could receive up to £7,280 a year tax-free, but this will be increased in three stages to £9,770 by 2011. Similarly, people aged 75 or over could previously have income – including pensions – of up to £7,420 a year tax-free, but this will be raised to £10,000 by 2011.

Pensioners will also be able to apply for grants of between £300 and £4,000 to install insulation and central heating in their homes and until 2012 all new energy-efficient homes deemed to have zero carbon emissions will be exempt from Stamp Duty.

From 6 April 2008, basic-rate taxpayers will potentially have to invest more money into their pension savings in order to achieve the same effects as previously, due to the scrapping of the 10 per cent income tax band on earnings and the lowering of the basic rate from 22 per cent to 20 per cent. These changes will reduce the tax relief that pension contributions attract, although higher earners are unaffected and will continue to receive 40 per cent initial tax relief.

The amount of allowable investment into Individual Savings Accounts (ISAs) increased to £3,600 for cash ISAs as part of a total allowance. This equates to a 20 per cent increase in the cash investment allowed and commences from 6 April 2008.

The Capital Gains Tax (CGT) allowance is now transferable between a husband and wife and civil partners. This means that a married couple can make £18,400 of capital gains during the 2007/08 tax year without any longer having to transfer assets between them. The tax-free allowance for individuals rises to £9,200.

We are still awaiting the publication of the new regulations concerning the inheritance tax (IHT) reporting limits and also await the formal guidance notes confirming the IHT status of gifts to a bare trust for minor beneficiaries.

The absence of the new regulations for IHT means that those making gifts of over £10,000 to most types of trust need to report that gift to HM Revenue & Customs.

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