Personal taxes

Income tax - changes to allowances and rates

The basic personal allowance for 2008/09 was increased above inflation from £5,225 to £6,035 as a one off measure to compensate for the loss of the 10 per cent starting tax rate.

For 2009/10 the personal allowance will be increased by £130 above inflation from £6,035 to £6,475. All other allowances, the income limit for age-allowances, the minimum amount of married couple’s allowance and the starting rate limit for savings will be increased in line with inflation.

For 2010/11, the basic personal allowance will be reduced in two stages as follows:

• where an individual’s gross income exceeds £100,000, the allowance will be reduced by £1 for every £2 of income above the limit up to a maximum of 50 per cent of the basic allowance
• where gross income exceeds a second limit of £140,000 the allowance will be  further reduced by £1 for every £2 of income above the limit up to a maximum of the full personal allowance.

There are no changes in respect of the basic and higher rates of tax for 2009/10 and 2010/11. These will remain at 20 per cent and 40 per cent respectively. The basic rate band limit will however be increased by £800 above inflation to £37,400 for 2009/10.

For 2011/12, a new 45 per cent rate will apply to taxable non-savings and savings income above £150,000. As a consequence of this change, a new rate of 37.5 per cent will apply to taxable dividend income above £150,000 thus introducing a third tax rate to be applied to dividends.

These changes will also apply to trusts where the trust rate and dividend trust rate will increase to 45 per cent and 37.5 per cent respectively from 6 April 2011.

How this affects you

By 2011/12, the Income Tax position for those earning less than £100,000 or more than £150,000 will be simple. Those earning less than £100,000 will have a full personal allowances and a top rate of 40 per cent. Those earning more than £150,000 will have no personal allowance and a top rate of 45 per cent. For those earning between these amounts the position will be complicated – the top rate of tax will be 40 per cent but the amount of personal allowance will vary.

Pension schemes

The maximum annual contribution limit will be frozen at £255,000 from 2010/11 to 2015/16. 

The lifetime allowance will also be frozen at £1.8m from 2011/12 to 2015/16.

How this affects you

Taxpayers are advised to look at some planning. With careful planning, tax relievable contributions of up to £510,000 or more can be made in a single tax year. Therefore, higher earners may want to defer pension contributions until the higher rates apply after 5 April 2011.

Extension to list of qualifying ISA investments

Under existing ISA regulations, only securities issued by a UK or European Government or by a company which has a share capital can qualify as investments for a stocks and shares ISA. 

From 16 December 2008 bonds issues by Multilateral Institutions can also qualify.

Multilateral Institutions are inter-government organisations usually involved in global development work – for example, UNICEF, World Health Organisation, African Development Fund.  Many such institutions issue bonds as part of their funding arrangements and extending the ISA regulations to include such bonds is part of the Government’s international poverty reduction agenda.