Personal allowances and higher rate thresholds were increased in line with inflation. Age-related allowances were increased at above inflation, taking more pensioners outside the charge to income tax. As announced last year, general income - salary, profits, pensions, rent - will no longer benefit from the 10% starting rate, while the basic rate drops from 22% to 20%. The benefit of these changes is in the region of £790 for a higher-rate taxpayer.
The loss of the 10% rate on earnings means that someone with a salary of between £5,650 and £16,500 could be worse off. A high earner will also pay more in National Insurance Contributions as a result of the raising of the upper earnings limit (see p.4), which will cancel much of the income tax cut. The people who benefit most are those with mainly investment income.
The overall effect is complicated by the different rates which continue to apply for general income, interest and dividends, and the possibility that a separate claim may be made for Working and Child Tax Credits to be repaid by the Revenue. The calculation of the tax position remains as complex as ever.
When the basic rate of income tax is cut, charities suffer a reduction in the tax they can claim back on Gift Aid donations. Charities and Community Amateur Sports Clubs will be temporarily protected from this drop in income in spite of the cut in basic rate on 6 April 2008: for the three years 2008/09 to 2010/11, they will still claim 28.2% of Gift Aid donations as if the basic rate was 22%. In 2011/12, according to the current proposals, the relief will drop to 25% for the charity. An individual will claim higher rate tax relief on the basis that the cash gift was 80% of a gross donation.
Income split between husband and wife
After the House of Lords ruled in 2007 that the taxman could not attack a tax efficient split of income between a husband and wife owning a small company together (the case of Garnett v Jones, also known as "Arctic Systems") the Government announced that the law would be changed to make sure that married couples in this situation "paid their fair share of tax".
Detailed proposals were published in December 2007 to reverse the benefit of "uncommercial income shifting" for tax. The Government appears to have heeded the criticism that the proposals would have made self-assessment impossible and has decided to defer any changes until April 2009.
Remittance basis for foreign domiciled people
In the October Pre-Budget Report, Mr Darling announced a new measure to restrict the tax advantages of foreign domiciled people living in the UK for the long term. Foreign domiciled people are allowed to pay tax on their overseas income and capital gains only if and when they bring the money into the UK - known as the "remittance basis of taxation".
As announced in October, a number of significant changes will be made from 6 April 2008. The most striking is the imposition of a flat rate £30,000 charge on those who choose to be taxed on remittances after being UK resident for 7 years. This will not apply to anyone who opts to be taxed on foreign income as it arises, or to someone with no more than £2,000 in overseas income and gains.
If you have in the past used the remittance basis, you need to review your situation urgently.
In deciding whether a person is resident in the UK for tax purposes, it is necessary to count the number of days spent in the UK. Until 5 April 2008, the Revenue's normal practice has been to ignore days of arrival and departure, which was very favourable to the taxpayer. From 6 April 2008, a day will be counted if the person is in the UK at midnight. This is more generous than the October announcement, which would have counted days of arrival and departure.