Happy New 'Tax' Year?

Do the increased personal allowances and rates for 2009/10 tax year mean extra money in the pockets of individuals this year?

What is happening to personal allowances?

The financial climate has meant that 2008/09 has been a tough year for many taxpayers. 6 April 2009 marks the start of a new tax year, from which date individuals under the age of 65 will be able to earn up to £6,475 before any tax is charged. This increase of £440 from the 2007/08 level of £6,035, equivalent to 5%, was calculated with reference to the level of inflation in September 2008, which is significantly higher than the current rate. If inflation remains this low people may feel a temporary unexpected boost in their April pay packets, although this is only a timing issue. This may also go some way to compensating individuals for the loss of the 10p tax band from 6 April 2008 which left many low income families out of pocket.

For those between the ages of 65 and 74 a higher personal allowance is available of £9,490 (£9,030 in 2007/08), and for those over the age of 75 this is further increased to £9,640 (£9,180 in 2007/08).

What about other benefits?

In addition to increased age related personal allowances, pensioners will also benefit from increased state pension payments, as the full state pension is due to rise to £95.25 per week.

Steps were taken by the Government which were announced in the Pre-Budget Report in November to assist families. The increase in Child Benefit was bought forward from April to January meaning that families will already be benefiting from this increase from £18.80 to £20.00 per week for the first child, which would mean an additional £22 on average to families. However to aid things further, the child element of the Child Tax Credit is also being increased above inflation to £2,235 (£2,085 in 2008/09). The family element of the Child Tax Credit that is available to families earning up to £50,000 before the amount is tapered has, however, remained at £545.

Many other benefits are also being increased by around 5% from 6 April 2009. As with the personal allowances, this is in line with the rate of inflation as at September 2008, which with inflation running at its current low levels may mean extra money in the pocket of a number of individuals.

What about other taxes?

The annual exemption for capital gains tax (currently at £9,600) has not yet been announced, but is expected to increase to £10,100 for 2009/10. 

The threshold for inheritance tax is set to rise to £325,000 in 2009/10 from its current level of £312,000. 

Increases in these limits, coupled with falling prices in these unstable times mean that for those looking at inheritance tax planning, now may be the perfect time for gifting assets or transferring them into a trust as a form of succession planning. Assets would be gifted/transferred at the market value at the date of transfer, which under current market conditions would mean lower base costs and a lower potential inheritance tax charge or capital gains tax charge on any gift/transfer.

Is there a down side?

Any cash injection caused by the increase in personal allowances and benefits is likely to be short lived, particularly for those higher earners. At the 2008 Pre-Budget Report, it was announced that from 6 April 2010, the personal allowance for those earning over £100,000 will be restricted. This means that the personal allowance will be restricted by £1 per £2 of income over £100,000, until a maximum reduction of one half of the full personal allowance is reached. For those earning over £140,000, the personal allowance will be further reduced at the same rate to zero. For narrow bands of income above the £100,000 and £140,000 thresholds, this means that there will be an effective rate of income tax of 60%.

In addition to these tapered allowances, a new super tax at a rate of 45% is to be introduced from 6 April 2011, meaning those with an income over £150,000 will be paying 45p in the pound. This rate will also replace the current rate applicable to trusts of 40%. A new top rate for dividends of 37.5% will also be introduced leaving three rates of tax applicable to dividends, 10%, 32.5% and 37.5%.

Finally, national insurance contribution (NIC) rates will increase by ½% on all levels of profits and employment income from 6 April 2011.

Francesca Lagerberg, Head of the National Tax Office at Grant Thornton says: "The increased personal allowances may inject a welcome boost into the pockets of hard working taxpayers. However this will only be a timing issue and measures to be introduced in the future may mean that this glimmer of hope introduced by the new tax year will be short lived. Watch out for the budget on 22 April in case any changes are made."

Please contact us if you would like further advice on any of the above.