Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN01 Modernising the personal tax system

Who is likely to be affected?

1   All taxpayers and payers of National Insurance Contributions (NICs).

General description of the measure

2   The basic rate of income tax will be reduced to 20% from 2008-9.

3   The starting rate will be removed for earned income and pensions but will continue to be available for savings income and capital gains. There are no changes to the rates applicable to dividends.

4   Age related Personal allowances for those aged 65 to 74 and 75 and over will be increased by 1180 over indexation. The personal allowance for those aged 75 and over will increase to 10,000 in 2011-12.

5   The Upper Earnings Limit (UEL) for employee's Class 1 NICs for 2008-09 will be increased by 75 pw (3,900 for the year) above indexation. The Class 4 National Insurance Upper Profits Limit (UPL) for the self employed will also be increased by the same amount.

6   The following year, the Basic Rate Limit will be increased by a further 800 above indexation, and both the UEL and the UPL will be aligned with the new point at which the higher rate of tax becomes payable after personal allowances have been taken into account.

Operative date

7   The changes will come into effect for 2008-09, with the final increase in the BRL and alignment of the UEL/UPL becoming effective from 2009-10. The increase to 10,000 for the personal allowance for those aged 75 and over will be made in 2011-12.

Current law and proposed revisions

8   The basic rate of income tax up to and including 2007-08 is 22%. For 2007-08, it is payable between the starting and basic rate limits of 2,230 and 34,600. The basic rate will be changed to 20% in Finance Bill 2008.

9   The starting rate of income tax is 10% up to and including 2007-08. It is the first rate of income tax charged on all income types after personal allowances have been deducted. The starting rate limit for 2007-08 is 2,230. Finance Bill 2008 will remove the starting rate of tax from earned income and pensions. It will continue to be available for savings income and capital gains. There are no changes to the rates applicable to dividends.

10 Personal allowances are increased in line with prices inflation each year, unless the increase is overridden in the Finance Act. There are three levels of personal allowance: the basic level for those under 65 and two higher levels, for those aged 65 to 74 and 75 or more. Finance Bill 2008 will increase the amount of the two higher levels by 1180 over the indexation figure. Finance Bill 2011 will increase the personal allowance for those aged 75 and over to 10,000. Indexed rises will be maintained in the intervening two Finance Bills.

11 Current Social Security legislation requires the maximum UEL to be less than seven and a half times the Primary Threshold. The Primary Threshold is the point at which Class 1 NICs become due. Changes to the UEL below this amount are made by Regulations annually. Any change to the UEL above this maximum requires primary legislation in a NICs Programme Bill. The UPL is aligned annually with the UEL by the Rerating Order.

12 The first step in the alignment of the UEL and the UPL with the amount at which higher rate tax is payable will be made in 2008 by Regulations and the Re-rating Order respectively. The second step for the UEL alignment will be made in a NICs Programme Bill in time for a start date of April 2009. The UPL will continue to be aligned with these rates via the annual re-rating process. The amount of the aligned figure for income tax purposes will be achieved for 2009-10 by increasing the amount of the basic rate limit by 800 above indexation in Finance Bill 2009.

Further advice

13 If you have any questions about this change, please contact Barbara Jones on 020 7147 2491 (email: Barbara.e.Jones@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk