March Budget
The March budget contained the usual fiscal changes but should the Tories be elected to power on May 6th, they have promised another budget within 50 days so there could very well be another round of changes in the near future.
However, here is a round up of the changes to Tax, Pensions and Savings that will affect many of us.
Income Tax
The changes in Income Tax were announced in the Pre Budget report in December and as the budget did not contain any changes to these announcements the following applies for this tax year.
The basic tax rate stays the same at 20% and the higher tax rate at 40%. There is also the basic tax rate of 10% for dividends and a 32% tax rate for the higher rate of dividends. There are no increases for personal allowances and penalties of up 200% of tax for failure to declare a full amount of income tax or CGT liabilities should the failure to declare be linked to an offshore matter.
There are two notable changes to the structure of income tax and they are mainly aimed at higher rate tax payers. There will be a phasing out of personal allowances for tax payers in this bracket and the introduction of a 50% income band. The personal allowance is scheduled to be phased out for incomes of over £100,000 at the rate of £1 for each £2 of income over that figure. If someone has an income of between £100,000 and £112,950 it means that they are in effect paying a tax rate of 60%. The amount of taxable income that needs to be reached to trigger this 50% income tax rate is £150,000. For dividend purposes this corresponding rate is 42.5%
Pensions
An annual allowance was introduced in 2009 which was seen as a major change in pension tax law which restricted a higher rate of tax relief on some pension contributions. This allowance will only continue to affect individuals in 2010/11 under the following conditions. The contributors relevant income is over £130,000 in the current year as well as in the previous two tax years and they increase their normal ongoing pension savings and the total pension savings by £20,000 if paid monthly and of up to £30,000 if the savings are made by any other means.
Individual Saving Accounts (ISA's)
A welcome piece of news from the budget is that the limit on tax free savings in the form of an ISA has increased. Regardless of age, everyone can now invest up to £10,200 in their ISA each year and this limit is index linked. Half of the £10,200, i.e. £5100 can be invested in cash. It should be noted that any savings in an ISA are only tax free whilst the holder of the ISA is alive. Upon death and depending on the holders tax bracket, all of the value of the ISA could be subject to inheritance tax at the current rate of 40%
