Personal allowances and tax rate bands were increased in line with inflation. The benefit is in the region of £320 for a higher-rate taxpayer. The benefit is much smaller for a person on a low income, but is likely to represent a larger share of that person's tax bill.
The overall effect is complicated by the different rates which continue to apply for general income, interest and dividends, the additional charge to National Insurance and the possibility that a separate claim may be made for Child and Working Tax Credits to be repaid by the Revenue. The calculation of the tax position remains as complex as ever.
The Chancellor's parting shot was to make major changes from April 2008:
abolition of the 10% band;
cut in the basic rate from 22% to 20%;
a significant increase in the upper earnings limit for NIC, leading to alignment with the 40% income tax threshold in April 2009.
This will lead to a simplification of tax calculations (although dividends will still have their special rates of 10% and 32.5%). The net effect will be an increase in the overall tax collected. However, there will be even larger tax cuts in 2008/09 and 2009/10 for those entitled to Child and Working Tax Credits and personal age allowances, which will all increase by more than inflation in those years.
Married couples/civil partners
The Chancellor took time in his speech to reject Conservative proposals to reintroduce married couple's allowances or to allow transfer of tax allowances between parents of young children. He claimed that the improvements to Child Tax Credits from April 2008 would be a better targeted measure.
There was no announcement of any changes to the taxation of "husband and wife businesses", the subject of the long-running Arctic Systems Ltd case. The House of Lords is due to rule later this year whether all the income should be taxed on the working spouse, and the Revenue have not pre-empted that decision in this Budget.
The Chancellor announced that the age allowances which are given to taxpayers over the age of 65 will increase substantially above inflation in 2008/09 and 2009/10, taking many pensioners out of the income tax net altogether. The increases for 2007/08 are in line with inflation.
Working and Child Tax Credits
WTC and CTC are also increased by inflation for 2007/08, and will also rise by significant amounts in 2008/09. Mr Brown stated that this was a way of targeting tax relief to those who need it most. The combined effect of increases in NIC, WTC and CTC, and changes to tax rates both up and down make it difficult to identify clear winners and losers from these Budget changes.