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Tax Facts 2007
| Welcome to the 2007 Budget Tax Facts |
| This document is prepared for guidance only. We
recommend that you contact us for advice before acting on any
information contained in the document and we cannot accept
responsibility for any action taken without such advice. |
Personal Taxation
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| Starting rate on first |
£2,230 |
£2,150 |
| Basic rate on next |
32,370 |
31,150 |
| Higher rate on taxable income over |
34,600 |
33,300 |
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| Starting |
10% |
10% |
10% |
| Basic |
22% |
20% |
10% |
| Higher |
40% |
40% |
32.5% |
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Taxable income uses up the rate bands in the following order:
* 'general income' (employment, business profits, rent)
* 'savings income' (mainly interest)
* 'dividends' (mainly distributions from companies)
Capital gains (after annual exemption and taper relief, see Personal Taxation and Capital Gains Tax) are added to the total income as the 'top slice' and taxed at the rates applicable to savings income (10%, 20% or 40%). |
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| A taxpayer who pays personal (including
stakeholder) pension policy premiums, or gives cash to charity,
increases the basic rate band by the grossed up equivalent of the
payment. This means that more tax is paid at the basic rate and less is
paid at the top rate. |
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2007/08 personal tax return: due to be filed by 31 January 2009
* penalty for late return: £100 (or the tax due, if less)
2006/07 tax payable:
* tax on employment income paid under PAYE each month
* basic rate liability on savings and dividends usually settled by receiving the income net of tax paid or credited
* balance of tax due under self assessment (SA):
- payments on account due 31 January 2008 and 31 July 2008, based on the 2006/07 SA income tax and Class 4 NIC
- balance, plus any CGT, due 31 January 2009, with the first payment on account for 2008/09
Missing any payment dates leads to interest; missing the balancing
payment date by 28 days will lead to a 5% surcharge and a further 5%
surcharge if not paid by following 31 July. |
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| Personal income tax allowance |
£5,225 |
£5,035 |
| CGT annual exemption |
9,200 |
8,800 |
| Blind person's allowance |
1,730 |
1,660 |
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| Personal allowance (PA) |
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| * Age 65 - 74 in the tax year |
£7,550 |
£7,280 |
| * Age 75 and over in the tax year |
7,690 |
7,420 |
| * Minimum* |
5,225 |
5,035 |
| Married couple' allowance (MCA)** |
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| * Age 65 - 74 |
6,285 |
6,065 |
| * Age 75 and over |
6,365 |
6,135 |
| * Minimum* |
2,440 |
2,350 |
| Income Limit* |
20,900 |
20,100 |
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* If the taxpayer's total income exceeds the income
limit (extended for gift aid and pension contributions), one-half of
that excess is deducted from the allowances - first from the PA until
the minimum is reached, then from the MCA until the minimum is reached.
** Amount depends on age of older spouse; allowed at 10%; nil if born
after 5 April 1935; reduced if marriage took place during the tax year. |
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Rent-a-room exemption for letting out part of the taxpayer's only or main residence: gross income of £4,250pa
Gift aid: on a cash gift to charity, the charity can reclaim
22/78 (28.2%) of the donation from the Revenue if the donor makes a
declaration. The donor increases the basic rate band by the gross gift
(100/78). The market value of gifts of land or quoted shares can be
deducted from taxable income for full tax relief, and the charity pays
no tax on the gift received.
Also "Give as you earn" scheme allows charitable gifts to be made from
pre-tax pay, so PAYE is reduced. |
Employee Taxation
|
Employment income is charged to both income tax (as
'general' income) and to Class 1 National Insurance Contributions. Tax
and NIC are normally paid by the employer through the PAYE system, but
an employee whose tax is not fully paid should complete a tax return
and settle the liability as described on page 2.
If the tax underpaid is up to £2,000 and the 2007/08 tax return is
submitted by 30 September 2008, or e-filed by 30 December 2008 the
underpayment can be settled through PAYE for 2009/10 rather than being
collected on 31 January 2009. |
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| Employers and employees both contribute. Employee
contributions are payable at 11.0% or 9.4% between the primary
threshold and the upper earnings limit, and a charge of 1% applies to
all pay above the upper earnings limit. |
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| LEL: lower earnings limit |
£87 |
£377 |
£4,524 |
| PT: primary threshold |
100 |
435 |
5,225 |
| UEL: upper earnings limit |
670 |
2,903 |
34,840 |
|
No NIC are payable by employee or employer on earnings up to the PT.
Earnings between the LEL and the PT must be reported by the employer,
and the employee receives credit towards the State Pension, but no NIC
are payable.
Rates of NIC on earnings above the PT depend on whether the employee is
within the State Second Pension (S2P), or whether the employer has
'contracted out' using a final salary (FS) or money purchase (MP)
scheme. |
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| PT - UEL |
11.0 % |
9.4% |
12.8% |
9.1% |
11.4% |
| Above UEL |
1.0 % |
1.0% |
12.8% |
12.8% |
12.8% |
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Contracting-out employers receive a special rebate on earnings between the LEL and the PT.
A person with more than one employment can defer the payment of some
employee NIC until after the end of the tax year, when the total amount
payable can be checked and limited so the full 11% rate is only applied
to income between the PT and the UEL. |
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| Employee benefits are usually valued at a 'cash
equivalent' and are then charged to income tax on the employee and
Class 1A NIC (at 12.8%) on the employer. The cash equivalent is
generally based on the cost to the employer of providing the benefit,
but the following are charged according to a statutory formula. |
| Cars provided by the employer: a percentage of the original list price of the car, depending on the CO2 emissions rating of the car. |
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| 15% of list price |
to 144g/km |
| 1% addition |
145, 150 etc. |
| max 35% benefit |
over 239g/km |
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| For diesel cars add 3% (min. is 18%, max. still
35%). There is no discount for the level of business mileage or the age
of the car, but deduct employee contributions for private use. |
Fuel provided by the employer for private
use in a company car is charged without reduction for contributions
unless all private fuel is paid for by the employee.
To calculate the taxable amount the percentage used to calculate car benefit is applied to a standard figure of £14,400. |
| Vans provided by the employer for an
employee's private use are charged at a flat rate of £3,000. If fuel is
provided as well, an additional £500 is charged. If private use is
restricted to home-to-work travel, there is no tax charge. |
| Loans of money of over £5,000 are charged on
the excess of the official rate (5% since 5.4.02, subject to change)
over any interest actually paid by the employee to the employer. |
| Use of assets is charged at 20% of the
original cost of the assets to the employer, or the value when first
made available to the employee, less any amount paid by the employee
for private use. |
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Many employee benefits are not charged to tax. A full list cannot be given here, but some of the principal ones are:
* providing one mobile phone, even with private use.
* subsidised meals available to all employees in a staff restaurant or canteen;
* the provision of 'green transport' such as works buses or the use of a bicycle for commuting. |
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| 1400cc or less |
9p |
9p |
6p |
| 1401cc - 2000cc |
11p |
9p |
7p |
| over 2000cc |
16p |
12p |
10p |
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* mileage allowances of up to 24p per mile for business use of the employee's motorcycle or 20p per mile for a pedal cycle
* contributions to approved pension schemes
* payments of up to £5 a night when staying away for 'personal incidental expenses' (£10 if abroad).
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Generally, employees are charged to income tax on
the value of shares that they are given or issued by their employer,
less any amount paid for the shares. This applies to 'free shares' and
to shares acquired under option schemes. NIC is also charged if the
company is quoted, as the shares can be easily sold.
If the employer operates one of these 'Revenue-approved' share schemes, the tax charge may be eliminated, reduced or deferred. |
Share incentive plans (SIP)
* 'free shares' to £3,000pa
* 'partnership shares' (employee buys with pre-tax salary) max
£1,500pa, employer can 'match' with up to 2 more for each one purchased.
* shares left in the scheme for at least 5 years: no income tax or CGT on the value when they leave the scheme. |
| Enterprise management incentives - small trading companies can grant options to buy up to £100,000 worth of shares to selected employees. |
| Company share option plans - share options to buy up to £30,000 of shares can be granted to employees. |
Approved savings-related share option plans - employees contribute to a Save As You Earn plan (max. £250 a month) to save the money needed to exercise options.
With approved option schemes, the employee pays CGT on sale of the
shares rather than income tax/NIC on exercising the options. The CGT
charge is likely to be smaller and later than the IT/NIC. |
Investment Reliefs
The main tax incentives for investment are:
* income tax deduction for amounts invested - the rebate is either at a
fixed 20%/30% or at the taxpayer's marginal rate of tax (DED'N)
* tax exemption on the income from the source (EXINC)
* tax exemption on gains arising (EXGAIN)
* the ability to defer capital gains on other disposals until the new investment is sold (DEFER)
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| The main types of tax-advantaged investments are: |
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| Contributions made to one 'Maxi-ISA' (max. £7,000
each year) or to separate 'Mini-ISAs' (max. £3,000 in the 'cash
component', £4,000 in the 'share component'). Subscription limits
increase to £7,200 in 2008/09 and rules on mini and maxi ISAs will
change. No restrictions on withdrawal. No relief for losses. |
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| No new contributions can be made to PEPs after
5.4.99, but existing PEPs can continue with their tax advantages. No
restriction on withdrawals, but money withdrawn cannot be reintroduced.
No relief for losses. To be combined with ISAs at a date to be
announced. |
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| 30% |
Yes |
Yes |
Not after 5/4/04 |
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| Relief is for subscription for new share capital in
approved VCT - a quoted company which invests in small, unquoted
trading companies. The income tax relief becomes permanent if the
shares are held for 5 years, but gains (if any) are exempt immediately.
No relief for losses. Limit £200,000 pa. |
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| Relief is for subscription for new share capital in
small, unquoted trading companies. The income tax relief becomes
permanent, and gains are exempt, if the shares are held for 3 years.
Further relief available for losses on disposal. Maximum investment
£400,000 per tax year. |
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The details of the contract with the pension company may vary, but they must be within the basic framework set down by tax law.
PPP premiums are paid net of basic rate tax. The policyholder pays 78%
and the Revenue pay 22%. Higher rate relief is given where due by
increasing the basic rate band in the tax computation.
While the money is held within the pension fund, it is exempt from
taxes on income and gains, so it grows faster than funds held directly.
When the policyholder takes the benefits under the scheme, 25% of the
accumulated fund can be drawn as a tax-free lump sum, and the balance
is used to provide an income (which is taxable). The income can be a
purchased annuity for life, or an "alternatively secured pension" in
which the fund is still identified and produces the income which is
paid to the pensioner.
Tax relief is due on an individual's gross contributions up to £3,600
(£2,808 net), or 100% of current year employed or self-employed
earnings if higher, up to £225,000 (in 2007/08).
When a policyholder takes benefits, the capital value on which benefits
are drawn (e.g. as a 25% tax-free lump sum) are measured against a
"lifetime allowance" (£1.6m in 2007/08). If the lifetime allowance is
exceeded, there is a clawback charge on the excess.
Employers can contribute up to £225,000 to employees' pension funds,
less any contributions made by the individual. The employer can enjoy
tax relief on the cost under the normal rules for trading expenses.
If a policyholder dies before taking any benefit under the scheme, the
fund usually passes to dependants free of IHT. If death is during
payment of benefits and a capital fund is payable to dependants, it is
likely to be subject to IHT. |
Capital Gains Tax
If the asset was owned before April 1998,
the cost is adjusted for the effect of inflation up to that month
before working out the gain. For assets bought since, the gain is
generally the excess of proceeds over cost.
CGT is self-assessed, reported and paid in conjunction with income tax, and the details are given on the Personal Taxation page. |
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For disposals since April 1998, gains are reduced
according to the length of time for which the asset has been owned.
Assets owned before April 1998 only count the complete years of
ownership after 5 April 1998, plus one year for a 'non-business asset'
which was owned on 17 March 1998.
Business assets (BA) have a more generous rate of taper relief:
* any shares in an employer company, which has to be a trading company if the employee owns over 10%
* any shares in unquoted trading companies
* 5% holdings in quoted trading companies
* buildings or other assets let by the owner for use by an unquoted trading company or unincorporated trade
* assets of an unincorporated business owned by a partner or sole trader.
Non-business assets (NBA) include most non-employee quoted shareholdings and residential investment properties.
The percentages of a gain which are chargeable for disposals in 2007/08 are: |
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| BA% |
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100 |
50 |
25 |
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| NBA% |
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100 |
95 |
90 |
85 |
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| NBA% |
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80 |
75 |
70 |
65 |
60 |
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| Taper relief is calculated after applying all other
reliefs (eg losses), apart from annual exemption. The effect of taper
can be expressed as a reduction in the rate of tax - the effective rate
for a 40% taxpayer on a BA owned for two years is only 10%, because the
gain is reduced to 25% of the full amount. The rate on NBA falls to 38%
with 5% taper, 36% with 10% taper, etc. |
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| A number of types of asset are exempt from CGT, including chattels (tangible movable property) which are bought and sold for less than £6,000; cars; and the taxpayer's only or main residence.
A taxpayer with more than one residence can choose which is to be
exempt, but it is not possible to apply the exemption to an investment
property which is rented out. |
| Gifts to charity are not charged to CGT, and gifts of quoted shares and land also enjoy an income tax relief (see Personal Taxation). |
| Deferral of gains is allowed on some types of reinvestment, such as subscription for new EIS shares (see Investment Reliefs). |
Trusts
Trusts are liable to income tax on income
and CGT on gains for each tax year. The trustees are responsible for
filing self assessment tax returns by the normal date (31 January 2009
for 2007/08) and paying the tax on the normal dates (payments on
account of income tax on 31 January and 31 July 2008, and the balance
of income tax and the whole of the CGT on 31 January 2009).
The tax rates applicable to trusts are: |
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| Rate on general income (profit, rent) |
22% |
40% |
| Rate on savings income (interest) |
20% |
40% |
| Rate on dividend income |
10% |
32.5% |
| Rate on capital gains |
40% |
40% |
| CGT annual exemption |
£4,600 |
£4,600 |
|
Discretionary trusts for vulnerable beneficiaries
(such as disabled people) can pay tax at the lower rates if an election
is made. Discretionary trusts pay tax at the lower rates on income up
to £1,000.
The CGT annual exemption is divided between trusts established by the same settlor since 1978, to a minimum of £920.
Trusts are also liable to pay inheritance tax in a variety of
circumstances, and trustees should make sure that they have appropriate
professional advice to enable them to fulfil all their legal and fiscal
responsibilities. |
National Insurance Contributions
For employees' NIC, see Employee Taxation page.
Self-employed people pay:
* weekly Class 2 contribution of £2.20pw, unless they claim exception
or small earnings (below £4,635). Usually paid monthly by direct debit.
* Class 4 NIC at 8% of taxable profits between £5,225 and £34,840.
Profits over £34,840 will be charged at 1%. This is assessed and paid
with the self-assessment income tax on profits.
Class 3 voluntary NIC may be paid at £7.80 per week by someone who is
not in work but who wishes to maintain state pension rights. |
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| Someone who is both employed and self-employed will
pay Class 1, Class 2 and Class 4 NIC. It is possible to apply for
deferment of Class 4 so that the Class 1 paid on earnings can be taken
into account. Class 4 will then be charged at only 1%, and the overall
liability will be settled at a later date. |
Tax Credits
Tax Credits are the main way in which the
tax system provides support to people with children and workers on low
incomes. Tax Credits are paid to those who claim them, and are not an
adjustment in the tax computation.
Working Tax Credit (WTC) is paid to employed and self-employed people
on low incomes. The full entitlement is given for an income of only
£5,220, and it is tapered away as a couple's joint income increases
above that.
There is an additional element which will cover 80% of qualifying
childcare costs of up to £300pw for two children, and a couple entitled
to this can enjoy substantial credit even on incomes over £30,000.
Child Tax Credit (CTC) is paid to the main carer for children up to 16
years old, or up to 18 in full-time education. Entitlement is built up
of elements for each child, and for "the family". The child elements
are tapered away as income increases. The family element of £545 will
be paid in full to couples with a combined income of up to £50,000;
after that, it will be tapered away to nothing by the time the joint
income reaches £58,000, or £66,000 in the year a child is born.
Claims are made provisionally for the coming year based on a previous
year's income (2006/07 for 2007/08 claims), and may be revised up or
down at the end of the year if income has changed significantly.
However increases in income will be disregarded if they are up to
£25,000.
The Tax Credits system is very complicated, and this can only serve as a brief summary. The HM Revenue & Customs website (www.hmrc.gov.uk)
has a ready-reckoner facility which will estimate the amount of either
tax credit due, and also has forms and details of how to apply. |
Inheritance Tax
|
| The nil rate band for cumulative chargeable
transfers in the last seven years is £300,000 for gifts from 6 April
2007 onwards. Gifts above that are charged at the following rates: |
| Chargeable legacies on death |
40% |
| Gifts within 7 years of death |
40%, with reductions if over 3 years before death |
| Lifetime chargeable gifts |
20% if the donee pays the tax, 25% if the donor pays |
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Inheritance Tax (IHT) on a deceased's estate and on
gifts within 7 years of death is generally payable at the end of six
months after the month of death, but it must be paid before probate is
granted, and this may necessitate earlier settlement.
IHT on chargeable lifetime gifts is payable on the later of six months
after the month of transfer or 30 April in the next tax year. |
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The following transfers are exempt from IHT:
* the first £3,000 gifted in a tax year (unused limit may be carried forward for one year)
* small gifts of up to £250 to one person in a year
* normal expenditure out of income
* gifts between husband and wife, unless the donor is domiciled in the UK and the recipient is not
* gifts between individuals more than 7 years before the donor's death
(until the donor dies such gifts are left out of account as
'potentially exempt')
* gifts in consideration of marriage - £5,000 from a parent, £2,500
from a grandparent or a party to the marriage, £1,000 from others
Most business and agricultural property enjoys a 100% relief once it
has been owned for two years, although some types of property are
relieved only at 50%, and it is important to meet all the conditions. |
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| From 6 April 2005, an income tax charge applies to
certain arrangements which remove assets from an IHT-chargeable estate
but allow the former owner to use or enjoy them. |
Business Tax
| Businesses in general pay PAYE in respect of
their employees, and VAT on turnover if they are required to be
registered for that tax. Unincorporated businesses (sole traders and
partnerships) pay income tax and NIC on their profits; companies pay
corporation tax on all their profits including capital gains. |
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Capital expenditure is not generally allowed as an
expense. Instead, many classes of capital expenditure receive a capital
allowance, which may spread the cost over several years, and which is
not related to the accounting depreciation.
The major categories of capital allowance in 2007/08 are: |
| Plant and machinery |
|
| * general: writing down allowance on residue of expenditure |
25% |
| * small businesses: first year allowance |
50% |
| * medium businesses: first year allowance |
40% |
| * all businesses: approved energy saving plant |
100% |
| Cars |
|
| * general: writing down allowance (max £3,000pa) |
25% |
| * low emission cars (rating up to 120g/km) |
100% |
| Long life plant: writing down allowance |
6% |
| Research and development: capital equipment |
100% |
| Buildings (excluding land value) |
|
| * industrial buildings: straight line allowance |
4% |
| * agricultural buildings |
4% |
| * qualifying hotels |
4% |
| * enterprise zone commercial buildings |
100% |
| * enterprise zone buildings if 100% not claimed in first year |
25% |
| * converting vacant space over commercial premises into flats |
100% |
| Know-how and patent rights (not corporation tax) |
25% |
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| Major changes have been announced to take effect in 2008/09. |
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Certain categories of capital expenditure by
companies are treated differently. New expenditure on 'intangible
assets', including goodwill, know-how and patent rights, is in general
relieved for tax according to the accounting treatment (ie
depreciation).
There are increased allowances for companies which clean up
contaminated land or carry out R&D work - the expenditure is
uplifted for tax purposes, effectively creating a grant for doing the
work. The uplift is 50% for land remediation and for small/medium
company R&D, and 25% for large company R&D. These are set to
increase in 2008. |
Corporation Tax
|
| The rate of tax depends on the total profits of the
company, but marginal relief is available where the profits fall within
particular bands. The effective rate of tax within the band is shown in
the table. |
|
|
| £0 - £300,000 |
20% |
| over £1.5m |
30% |
|
Marginal relief applies to profits between £300,000 and £1.5m giving an effective marginal rate of 32.5%.
The bands are adjusted for associated companies and for accounting periods of less than 12 months.
>From 1.4.2008 the main rate will decrease to 28% and the small
companies rate will increase to 21%. The marginal rate will be 29.75%. |
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Companies which do not pay at the full rate (ie
profits below £1.5m) settle their CT liability 9 months and a day after
the end of the accounting period.
Large companies generally make payments on account of CT 6.5 months,
9.5 months, 12.5 months and 15.5 months after the start of a 12 month
accounting period, with interest running until final settlement of the
period's liability.
All companies file returns 12 months after the end of the period. |
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| Companies are not charged to CT on dividends
received from other UK companies. Individuals and trusts receive
dividends with a 10% 'tax credit'. The dividend plus the tax credit
(100/90 of the amount received) is treated as taxable income, and the
10% tax credit settles some or all of the tax liability. But a taxpayer
with no liability cannot obtain a repayment of the tax credit from the
Revenue - it can only be used to settle liabilities. |
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| Trading companies do not pay tax on disposals of
'substantial shareholdings', which are 10% holdings in other trading
companies which have been held for at least 12 months. |
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| Companies can receive a 20% tax credit for
investment in new shares in qualifying 'corporate ventures'. Such
companies must be owned at least 20% by individuals, and the corporate
investor must own not more than 30% to qualify. |
Value Added Tax
|
The standard rate of VAT is 17.5%, or 747 of the consideration received for making a supply.
A lower rate of 5% (or 121 of the gross receipt) applies to some
supplies such as domestic fuel and power, installation of energy saving
materials in houses, and some conversions of residential property.
A zero rate applies to a range of supplies including most food, books, new houses, and children's clothes.
Certain other supplies are exempt, which means no tax is charged to the
customer, but the supplier cannot recover VAT on costs. These include
many land-related supplies, insurance, finance, education, health and
welfare, and non-profit sports clubs. |
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An unregistered business must register if it has
made £64,000 of taxable supplies in the last 12 months, up to any month
end, or if it expects to make £64,000 of taxable supplies in the next
30 days.
A registered business can deregister if it can satisfy HMRC that taxable supplies in the next year will not exceed £62,000.
Small businesses with taxable turnover of up to £150,000 can opt to use
the 'flat-rate scheme'. A single rate, which varies with the type of
business, is applied to all receipts, and no VAT is claimed on costs.
The single rate is lower than 747 to compensate for lost input tax.
Small businesses with taxable turnover of up to £1.35m can use the cash
accounting scheme (only paying VAT to HMRC when customers have paid).
The annual accounting scheme (filing a single VAT return each year
instead of one every three months) is also available with turnover up
to £1.35m. |
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Where a business buys car fuel and allows it to be
used for private motoring, it has to account for output tax on the
supply. The system of scale rates is changing with effect from 1 May
2007, and the new rates are more complicated than the old. It will be
necessary to find out the CO2 emissions rating of the car and find the
exact charge on the HMRC table.
Example rates for a 3-month period are:
* up to 140g/km: £27.11 VAT (was £40.66 for engine size up to 1400cc)
* over 240g/km: £63.45 VAT (was £75.66 for engine size over 2000cc)
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| Most VAT returns are prepared for three-month periods, and they are due (with any payment) by the end of the next month. |
Stamp Duty
| Stamp duty, stamp duty reserve tax (SDRT)
and stamp duty land tax (SDLT) are charged on transactions in shares
and land. The rates are: |
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| * |
shares (stamp duty/SDRT) |
0.5% |
| * |
land (SDLT): |
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- up to threshold |
0% |
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- threshold - £250,000 |
1% |
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- £250,001 - £500,000 |
3% |
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- over £500,000 |
4% |
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| The threshold depends on whether the property is residential or commercial and whether it is in a "disadvantaged area": |
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| General |
£125,000 |
£150,000 |
| Disadvantaged |
£150,000 |
£150,000 |
| |
From 1 October 2007 the first sale of a new "zero carbon" house will be exempt from SDLT if the value is up to £500,000.
Stamp duty is charged on the total consideration, and is always rounded up to the nearest £5.
SDLT is charged on the whole consideration and is rounded down to the nearest £1.
SDLT is charged on the grant of a lease on any premium (using the above
rates) and on the discounted net present value of the rental stream.
This charge is at 1% of the excess of the NPV over the threshold.
Gifts, wills and other 'gratuitous transfers' are generally not liable to duty at all.
Stamp duty and its related taxes are normally due from the purchaser within 30 days of the chargeable transaction. |
Insurance Premium Tax
Insurance premium tax (IPT) is charged on
insurance premiums at 5% (general insurance) or 17.5% (travel insurance
and warranties sold with cars and certain household goods). It is
generally collected by the insurer as part of the premium.
Some long-term insurance products are exempt from IPT, such as term life insurance, endowments and pensions. |
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