June 2008

10% Tax Rate Climb Down

We live in quite amazing times in the world of tax. Over a year ago, in Gordon Brown’s last Budget speech as Chancellor, the so-called ‘abolition’ of the 10% starting rate was announced. The government’s reason for this was, and still remains, the simplification of the tax system.

Of course, the 10% rate hasn’t been ‘abolished’, it merely does not apply to all forms of income anymore. The income it may still apply to, depending on your circumstances, is savings and dividend income but not pension, earned, property and other income.

It became clear that, if earnings were taxed at 20% basic rate and not the old 10% rate, there would be many losers – around 5 million of them, unfortunately most of them being the lowest earners in the country.

So, following extensive media coverage, and potentially faced with a back-bench revolt and the possibility that the Finance Bill would be compromised, the new Chancellor Alistair Darling has announced

• an increase in the personal allowance of £600, from £5,435 to £6,035; and
• a reduction in the basic rate limit of £1,200, from £36,000 to £34,800.

These changes mean that basic rate taxpayers will benefit by £120 per tax year whilst the position of higher rate taxpayers will be unchanged.

Provisional announcements indicate that the changes will not take effect for employees until September.

Internet Link:

BBC website