tax

This is the third article in a series on the key UK personal tax changes from April 2008. For the others, please see the introduction.

Basic rate of income tax has been cut to 20%

At last, something to cheer about! The world economy is in turmoil, banks are going belly up, and stock markets are falling, but at least this year will see most UK employees paying less income tax. The exceptions are lower-paid workers who are more affected by the scrapping of the 10% tax band we covered yesterday than by any gain from the cut in basic rate tax.

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This is my second article in a week long series on the key personal tax changes that came into affect in April 2008. For the others, please see the introduction to 2008 tax changes.

10% tax rate abolished

Sunday saw the scrapping of the 10 per cent starter rate (also called the 10p rate) for the first £2,230 of taxable income. The move was introduced in conjunction with a reduction from 22 per cent to 20 per cent on the basic rate of tax on income of up to £36,000 a year.

While everyone with taxable income will be due to pay more tax on the lower portion of their earnings because of the 10% band’s abolition, those on better salaries won’t notice because they’ll gain more from the cut from 22% to 20% than they’ll lose on the 10% band scrapping.

The lower-paid will notice, however. The Institute for Fiscal Studies has said a total of 5.3 million households will see their take-home pay fall as a result of the change, particularly people earning between £5,200 and £18,500. (When your earnings are greater you’ll start to benefit more from the basic rate cut to 20% than you’ll lose on the abolishing of the lower 10% band, while those earning less than £5,435 don’t pay income tax at all).

You can see the Goverment’s website for a detailed picture of personal tax allowances and rates.

Why is a Labour Government taxing the poor?

The Government argues it will make up the shortfall for the lowest paid and vulnerable with child tax credits and other state handouts; people over 65 get higher personal allowances, for instance.

That’s done nothing to stop a row erupting, driven by an unlikely alliance between David Cameron and the more right-wing media, and Labour MPs and other leftwingers who baulk at tax hikes for the poorest workers. There is even confident talk of getting the abolition overturned.

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This is the first in my special five-part series entitled Five big boring tax changes that will make you richer or poorer in 2008/09. For the others, please see the introduction to the series.

From April 6th 2008, ISA rules for UK residents change as follows:

• Your annual total ISA allowance rises to £7,200, and the stupid ‘maxi’ and ‘mini’ ISA distinction is abolished.
• Instead, you can get a cash ISA and/or a Stocks & Shares ISA.
• You can invest from £0 to £3,600 in a cash ISA during the year, and the balance (up to your total of £7,200) into a Stocks & Shares ISA.
• Personal Equity Plans (PEPs) held from the 1990s are reclassified as Stocks & Shares ISAs.
• You will be able to convert cash ISAs into Stocks & Shares ISAs in the future, but not vice-versa.

Why you should use ISAs to save tax

ISAs (Individual Savings Accounts) are a UK investor’s best friend – arguably better than personal pensions. You can hold loads of different types of assets in them, including shares, cash, investment trusts, unit trusts, and bond funds, and you don’t have to pay extra tax on the income you receive in them. Nor do you pay on capital gains on investments held in an ISA when you sell.

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Today is the last day of the UK tax year. Hurrah!

Fair enough, the end of the tax year can’t really compete with this afternoon’s Grand National, the 172-year old steeplechase that will be watched by 600million viewers worldwide. But paying closer attention to your taxes will almost certainly leave you richer than betting on Shed a Tear for Gordon at 100-1.

I admit I took far too long to get interested in tax, in as much as I am ‘interested’ now, which isn’t very. But I belatedly realised that it’s pointless spending hours on my investing, let alone working hard for a wage, only to give away lots of my earnings through paying needlessly large amounts of tax.

Some of the tax-related moves I’ve made since that lightbulb moment include:

• Being sure to use my full ISA allowance each year (I wish I could go back to the early years of ISAs and PEPS when I didn’t do this!)
• Favouring dividend income over cash savings, except for my emergency funds (dividends are taxed more favourably than cash in the UK)
• Buying AIM shares, which attracted a lower-rate of tax if held for two years
• Trying to use at least some of my Capital Gains Allowance each year, to ‘defuse’ long-term tax bills
• Investing in VCTs, which give an income tax rebate and tax free dividends
• Putting my freelance earnings through a properly organised Limited Company

Tax changes in 2008/9

If you’re looking to begin planning your finances more tax efficiently, you’ve picked an interesting year to start; there are some reasonably big changes to look out for in this new tax year.

To mark this, I’ll be looking at UK tax changes over five articles.

My ‘Five big boring tax changes that will make you richer or poorer in 2008′ series will start with a summary of the newly revised ISA rules. If you don’t think ISAs are for you, make sure you read this article since nearly every saver in the UK should use ISAs.

In full, the exciting schedule of posts will cover the following major changes to the UK tax regime:

1. Annual ISA allowance rising to £7,200 a year
2. Scrapping of the 10% starting rate of income tax
3. Reduction of basic income tax rate from 22% to 20%
4. Capital Gains Tax to be charged at a flat 18%
5. AIM shares’ tax advantage being effectively abolished

Each post will link to at least two off-site resources, so you can read up further if you want to.

Those are the main changes coming in with this new tax year that I think UK-based Monevator readers should look out for, but there are lots of fiddly adjustments, too, such as the usual annual raising of the higher-rate tax band to compensate for inflation and so on. The Government’s own tax information page looks pretty comprehensive if you want to research further.

This series is a bit of an experiment for Monevator, so it’ll be interesting to see how many of you splendid folk tune in every day to read the posts. To help you remember, please consider subscribing via RSS or email.