What does the Budget mean for you? Our experts, Julia Whittle and Mike Warburton answer your questions in our online Q&A.
Mike Warbuton is senior tax partner at Grant Thornton and a leading tax spokesman. A regular contributor to the national press, he advises a range of clients on all manner of personal tax issues.
Julia Whittle, principal at Punter Southall, joined in September 2005 as business development director. Julia specialises in private client financial planning with regard to investments, matrimonial issues, personal injury, and international and ex-pat finances.
Further background reading
Questions are now closed, but more answers will appear here today. Thank you to everyone who submitted a question.
Should I pay more into my pension scheme after the income tax rejigging?
Darryl Thomson, London
Julia Whittle: From April 2008 as everyone knows now the basic rate of income tax will be cut by 2p to 20p - whilst this is good for earnings it is not so good for pensions. Pensions contributions receive tax relief at the basic rate at source, an individual only pays the net amount with the tax refund being reclaimed by the pension trustees. This refund will reduce from 22% to 20% from 2008. For some one currently contribution £250 per month in 2008 then the cut in tax refund will mean that their pension pot will have shortfall of approximately £20,000 in 40 years. They would need to increase their monthly contributions by approximately 2.5% i.e. to £256 to have the same benefits as they would have been expecting before the budget announcement. This has had the biggest impact on basic rate tax payers.
What are the implications of Cash ISAs have going up from £3,000 to £3,600?
Lucy Ellis, Cambridge
JW: The annual ISA investment limit will be raised from 6 April 2008. an individual will be able to subscribe up to £7200 in a stocks and shares ISA and up to £3,600 in a cash ISA. This is subject to an overall limit of £7,200 subscribed to both ISAs in a tax year. Although stocks and shares ISAs can be transferred into cash ISAs no such transfer is allowed form cash to stocks and shares which is unfortunate as it reduces the ability for investors to move between equities and cash freely to maximise market movements. For cash ISAs an increase in the allowance is welcome although the annual tax saving on the additional £600 would only be about £7 at average building society deposit rates.
For two pensioners over 65, what income level will all the new tax allowances be clawed back? J Birrell
Mike Warburton: From 2007/08, the level at which pensioners’ personal age allowances and married couples allowances begin to be reduced is when income reaches £20,900.
What is the personal allowances for pensioners under 75 and over 65 years. Can you transfer the allowances between the married couples? H.S. Ramaprasad
MW: From 2007/08 the personal age allowance for individuals aged between 65 and 74 is £7,550. This is reduced for those with income over £20,900. Unused married couples allowance may be transferred to the spouse (wife for marriages pre 6 December 2005)
In the Budget there were some changes to Venture Capitalist Trusts – could you enlighten us on what they mean?
James Knight, London
JW: Broadly the changes introduce new qualifying company rules to set limits on the number of employees allowed and the capital that can be raised in any 12 month period. The rule changes announced do not apply to existing VCTs or those VCTs raising funds in the current tax year.
Investee companies will not be able to raise more than £2 million in a twelve month period from VCTs that have carried out their fundraising after 6 April 2007. Also, VCTs raising money from 6 April 2007 will only be able to invest in companies with less than 50 full time employees. The requirement to remain 70% invested as a VCT appears to have been relaxed to allow for realisations from portfolios. The proceeds from realisations of investments that have been held for at least 6 months will be ignored as part of the 70% test for the following 6 months.
This means that VCTs still open this tax year are likely to be more attractive to many investors than the VCTs available next tax year. Next year’s VCTs will have to invest in smaller, higher risk companies and deal flow will be significantly reduced. Given that the changes apply from 6 April 2007, we would expect the majority of VCTs currently open to close on 5 April with new VCT structures unlikely to launch until the end of the summer.
When is 10% income tax band being abolished? From April 2007 or 2008?
MW: The 10% income tax band will be abolished in respect of non-savings income only from 6 April 2008. The 10% band will continue to apply to savings and dividend income.
Please can you tell me what the new threshhold for paying income tax is? As a low paid, casual, part-time employee this is an important issue.
MW: The personal allowance, below which tax is not due, will increase from £5,035 to £5,225 from 6 April 2007.
The chancellor has increased small company corporation tax to 22% but did he outline any changes to dividends paid from close companies?
Brian Robinson, Dungannon
MW: There was no mention of changes to the taxation of dividends paid from UK resident close companies in the Chancellor’s speech. He did announce that from 6 April 2008, the non-payable 10% tax credit which is currently available on dividends from UK companies will be extended to non-UK resident companies in most circumstances.
IHT is due to rise to £350,000 by 2010, but is it due to rise from £285,000 this year?
Dennis Everix, West Sussex
How soon and by how much, will the benefits of the increased IHT limit be realised?
Andrew Gardner, Bournemouth
JW: Yesterday the Chancellor announced plans to raise the nil rate band for inheritance tax (IHT) purposes to £350,000 in 2010/11. The nil rate band will rise to £300,000 in 2007/08, £312,000 in 2008/09 and £325,000 in 2009/10. Although the rises are in excess of general inflation (RPI) forecasts, any property owner will have seen average property prices increase well in excess of RPI and therefore the true benefit of this measure may be of little significance to the majority of people.
When will the higher rate of tax start to come into play from 43k, is this straight away or in 2010? Also, there is a comment from the FT saying that families with two children won’t start paying tax until they earn 22k. Is this true? Does this apply for a family with a single source of income, and if so how do you apply for this?
MW: The extension of the basic rate band upwards will be phased in over a period of two years to 2009/10. The FT comment would appear to relate to a couple with a joint income of £22k who qualify for Working Tax Credit and Child Tax Credit. To make a tax credit claim then you should contact H M Revenue and Customs’ tax credit helpline.
SMALL COMPANY DIVIDEND PAYMENTS
How is the removal of the 10% income tax band going to effect the numerous people who salary ourselves within the 10% tax band and take the rest as dividends?
Nickie Pye, Perthshire
MW: The removal of the 10% income tax band applies only to non-savings income and therefore dividends and savings income will continue to benefit from the 10% band.
I draw dividends from my ltd company and as I do not draw a salary I do not pay any tax on the dividend. What does the budget mean to me now?
John Lawley, Gerrards Cross
MW: The taxation of dividends received from UK resident companies has not changed. Dividends are taxable, after deduction of the personal allowance (2007/08 - £5,225), at the rates of 10% between 0 - £34,600 and 32.75% thereafter. Dividends received from UK resident companies carry an associated 10% tax credit which is deductible from an individual’s tax liability however it cannot be repaid. New measures were announced to the taxation of dividends from non-UK resident companies. As of 6 April 2008, the non-payable 10% tax credit which is currently available on dividends from UK companies will be extended to non-UK resident companies in certain circumstances. This tax credit will be on top of any double tax relief on withholding overseas.