Personal Taxation

Personal tax reform

The structure of personal tax will be reformed, bringing national insurance contributions (NICs) and higher rate income tax thresholds into line. In 2008/09:

• The basic rate of tax will be reduced to 20%.
• The starting rate of tax (10%) will be removed for earned income and pensions. There will be no changes to dividend taxation.
• Age-related personal allowances will be increased by a further £1,180 above indexation.
• The upper earnings limit (UEL) for employee’s class 1 NICs will rise by £3,900 above indexation, with a corresponding increase to the class 4 NICs upper profits limit.

In 2009/10, the basic rate threshold will rise by £800 above indexation and the UEL will be aligned with it. By 2011/12, the personal age allowance for those aged 75 and over will rise to £10,000.

Individual savings accounts (ISAs)

From 2008/09, the maximum annual amount that may be invested in a cash ISA will rise to £3,600. The maximum for a stocks and shares ISA will be £7,200, subject to an overall subscription limit of £7,200.

Tax Tip Use your ISA flexibly and invest early in the tax year to get the full benefit. If you have not already invested in a maxi ISA in the current tax year, you can open day-to-day savings account. As long as you do not deposit more than year, all the interest earned will be tax-free. Remember anyone aged 16 or over can open a cash ISA, so encourage your older children to save in this way as well.

Rebated commission arrangements for life assurance policies

A new tax treatment will apply to anyone who invests premiums of over £100,000 in any year into short to medium term life assurance policies, capital redemption policies or life annuity contracts where commission is rebated or reinvested in the policy by an intermediary.

If the policy owner holds the contract for less than three years after the year in which the £100,000 threshold is crossed, the amount of premium allowed in calculating the chargeable gains will be restricted to the true cost to the policy owner, taking into account the value of any commission rebate. The change takes effect for all policies and contracts made after 20 March 2007. It applies to all existing policies and contracts where further premiums are paid after that date.

Personal dividends from non-resident companies

From 2008/09, individuals who receive dividends from non-UK resident companies will be entitled to the tax credit of one-ninth of the distribution. Their shareholding must be less than 10% of the company, and the total dividends they receive from non-UK companies must be less than £5,000 a year.

Purchased life annuities (PLA)

An HMRC officer will no longer be required to determine the tax-exempt capital element of a PLA calculated by the insurer. This will clear the way for a re-write of the PLA regulations.

Alternative finance arrangements

New rules will apply from April 2007 to the taxation of certain types of investment bonds, known as ‘sukuk’, which satisfy Shari’a law. These bonds will be taxed on broadly the same basis as equivalent conventional securities.

Charities – gift aid

The limit on the value of benefits that individuals and companies may receive as a result of making gift aid donations of over £1,000 will be increased from 2.5% to 5% of the donation for all donations made after 5 April 2007.

Service charges and sinking funds

The existing relief from the 40% trust rate of tax for service charges and sinking funds will be given to all private sector landlords. As a result, such funds will normally be taxed at 20%. The change will take effect for income arising after 5 April 2007.

Landlords energy saving allowance

The current Landlords energy saving allowance (LESA) will be extended to cover floor insulation from 6 April 2007. The allowance will be increased to a maximum of £1,500 for each property, rather than each building, and its lifespan will be extended until 2015. LESA will also be made available to corporate landlords who let residential property, subject to state aid approval from the European Commission.

Tax Tip Do not forget to claim for the costs of your travel to your investment property. HMRC will allow you a mileage allowance for the journeys you make to the property to carry out inspections, repairs, or any other tasks your managing agent does not perform.

Homes abroad owned through companies

The Finance Bill 2008 will include legislation to ensure that individuals with a home abroad will not face a benefit in kind charge for any private use of the property if they buy it through a company. The exemption will have retrospective effect and will apply if:

• The property is held by a company owned by individuals.
• The company’s only activities are incidental to its ownership of the property.
• The property is not funded directly or indirectly by a connected company.
• The property is the company’s only or main asset.

Tax Tip If you let a property abroad, you must report the income received to the local tax authorities as well as to HMRC. You should report overseas rental income on the foreign income pages of your UK tax return, but you can offset the foreign income tax you pay on the property against your UK income tax liability.

Microgeneration

Householders installing microgeneration for their personal use will not be subject to income tax on any payment for surplus electricity sold to the grid. For these householders, Renewables Obligation Certificates acquired in respect of electricity generated from microgeneration technologies on their property will not give rise to an income or capital gains tax charge from 6 April 2007.

Tax credits

The child element of child tax credit will be £1,845 for 2007/08 and £2,080 for 2008/09.

From April 2008, the threshold for working tax credit will rise by £1,200 to £6,420 and the withdrawal rate will be 39% from April 2008. Currently, the working tax credit is withdrawn at the rate of 37% of income above £5,220 a year.