Income tax & Personal Savings

Starting rate example

In 2009/10, Mr Morris has earnings from employment of £7,000 and savings income of £4,000. His personal allowance is £6,475 which is completely used against his earnings, leaving £525 taxable at 20%. The rest of the starting rate limit for savings (£2,440 - £525) can be used to tax £1,915 of his savings income at 10%. The balance of his savings income of £2,085 (£4,000 - £1,915) remains taxable at 20%.

Mr Morris’ employer has deducted £105 through PAYE and his bank will have taken tax off all of his interest at 20%, so he can claim a repayment of tax of £191.50 (£1,915 at 10%) from HMRC.

Individual Savings Accounts (ISAs)

The ISA limit will be raised to £10,200, up to £5,100 of which can be saved in cash. The new limits will apply from 6 October 2009 for people aged 50 and over in 2009/10 and for all ISA investors from 2010/11 onwards.

Child Trust Fund

Starting in April 2010, for children in receipt of Disability Living Allowance at any point in 2009/10, the Government will contribute £100 every year to the Child Trust Fund accounts of all disabled children born on or after 1 September 2002, with severely disabled children receiving £200 per year.

Income shifting

The introduction of controversial legislation designed to prevent 'income shifting' will not take place in April 2009 as previously announced. The Government maintains its stance that it 'firmly believes it is unfair' to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax. However, in the light of the current economic climate the Government has deferred action and is instead keeping the issue under review.

Taxation of overseas dividends

Since 6 April 2008, individuals with shareholdings of less than 10% in non-UK resident companies have been entitled to a non-payable tax credit. From 22 April 2009, individuals with shareholdings of 10% or more in receipt of dividends from non-UK resident companies will become entitled to a non-payable tax credit, subject to certain conditions.

The non-payable dividend tax credit for offshore funds which are largely invested in equities will be restored from 22 April 2009. The new rules will also provide that where the offshore fund is substantially invested in interest bearing assets, individuals receiving distributions will be treated for tax purposes as having received interest and not a dividend or other type of distribution.

Pension savings

The Chancellor announced that tax relief on pension savings will be restricted to the basic rate from 6 April 2011 for those with  taxable income of £150,000 or more.

Anti-forestalling measures have been announced. They will prevent those potentially affected from seeking to forestall this change by increasing their pension savings in excess of their normal regular pattern prior to the restriction taking effect. Those measures will not affect:

• those with income of less than £150,000 for the 2011/12 tax year and for both of the preceding two tax years, and
• those with income in any of the relevant tax years of £150,000 or more who continue with their existing pattern of regular savings and who do not make any additional pension savings.

Those who do increase their pension savings will be affected only if their total pension savings in the year exceed £20,000. The change will not affect any normal, regular ongoing pension savings that were in place before 22 April 2009, whatever their value.

Personal allowances for non-resident individuals

Certain non-residents are entitled to claim UK personal allowances by virtue of being Commonwealth citizens. Following advice that this particular condition is not compliant with the Human Rights Act, the entitlement of such non-residents will be withdrawn with effect from 6 April 2010.

Entitlement will continue for those qualifying as, for example, EEA nationals, Crown servants and residents of the Channel Islands and Isle of Man.

Employer-provided (rented) living accommodation

An employee has typically been charged to tax on the amount of rent the employer pays for the accommodation. Avoidance through payment of substantial premiums and small rents will be stopped for leases entered into or extended from 22 April 2009 by treating a premium paid for a lease of 10 years or less as rent paid.

2010/11 onwards

The Chancellor announced a new higher income tax rate of 50% to apply from 6 April 2010 for taxable income over £150,000. Also announced were consequent changes to the rate of income tax on dividends, with a top rate of 42.5% and the rates of tax on trusts with a 42.5% rate on dividends and a 50% rate for other trust income.

From 2010/11 the basic personal allowance for income tax will be gradually reduced to nil for individuals with 'adjusted net incomes' above £100,000.