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Modernising the personal tax system

Personal Tax rates
The Chancellor announced an apparent overhaul of the personal tax system, by reducing the basic rate tax band from 22% to 20% with effect from 6 April 2008.

This was combined with the removal of the starting 10% rate on earned income and pensions with effect from the same date. The 10% band will however remain in place for savings income and capital gains.

National Insurance
The reduction of income tax rates will however be balanced by an increase in the upper limits for both employee’s class 1 National Insurance Contributions and Class 4 National Insurance for the self employed.

The increase of £3,900 above inflation in 2008/09, which is designed to bring the upper earnings limit for National Insurance in line with the higher rate tax threshold, results in the net effect for most taxpayers, of the personal tax and National Insurance changes being minimal.

Personal Allowances and Tax Bands
For 2007/08 the personal allowance and tax bands will increase in line with indexation. It was also announced that the following year the increase in age related personal allowances will exceed indexation by £1,180 and the basic rate band increase will exceed indexation by £800.