Quarterly News

Can we look forward to a 'simpler' tax system?

This year's Budget was unusual in two respects:

• it was the last to be presented by Gordon Brown
• it gave a picture of our tax system not just for the current tax year but set out some principles which will not be fully in place until 2009/10.

To get from where we are now to the 'simpler' tax system involves a number of complex changes which are being introduced in different tax years. However by 2009/10 the key part of the changes is the alignment of the income tax and national insurance (NI) bands.

In summary, the bands will be (ignoring increases expected due to inflation but including proposed NI banding increases):

Income tax and NI bands for the periods 2007/08 and 2009/10.

	2007/08	2009/10
Income Tax
Personal allowance	5,225	5,225
Starting band on earned income	2,230	Nil
Basic rate band	32,370	35,400
Higher rates start at:	39,825	40,625
NI
Lower earnings limit	5,225	5,225
Upper earnings limit	34,840	40,625

So considering income tax and NI together on employment income, there would be three effective tax rates:

• 0% on income up to the personal allowance
• 31% (20% income tax and 11% NI) on income in the basic rate band
• 41% (40% income tax and 1% NI) for higher rate taxpayers.

The self employed will pay Class 4 contributions at 8% on the profits falling within the basic rate band so their tax rates are 0%, 28% and 41%.

Do these changes mean you are better or worse off? The answer for many is that there will be little difference in the overall tax and NI bills. Broadly, what has been saved in income tax will be taken back again in increased NI.

There the simplification ends because if your main income consists of interest or dividend income, the starting rate band remains and the tax rates will be:

Interest or dividend income tax rates.

Tax year 2009/10	Bands	Tax Rates
		Interest	Dividends
Personal allowance	5,225	0%	10%
Starting band rate	2,230	10%	10%
Basic rate band	38,395	20%	10%
Higher rates start at:	40,625	40%	32.5%

So, taxpayers with little earned income end up paying no NI and less tax than taxpayers with earned income. This is a rather strange conclusion for those with long memories as in times gone by the tax system charged investment income to a surcharge.

What else did the Budget give us?

Well, potentially significant changes to corporation tax rates and capital allowances and these are examined elsewhere in this edition.

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