Income Tax

Tax rates

Yet again there has been no change to income tax rates. Therefore, the starting rate remains at 10%, the basic rate at 22% and the higher rate at 40%. The system continues to be further complicated by the rules for savings and dividend income.

Comment

There had been speculation that something akin to the old investment income surcharge would be reintroduced but thankfully this has not materialised. Indeed the increases in national insurance detailed in the Employment Issues section of this summary mean that, unusually, in 2003/04 higher rate taxpayers with earned income will pay more of that income to the government than those with investment income.


Allowances

For 2003/04 the personal allowance for the under 65s is frozen at its 2002/03 level of £4,615 rather than being increased in line with inflation. Personal allowances for those aged 65 and over have been increased by more than inflation. For those aged 65-74 the allowance is £6,610 and £6,720 for those aged at least 75. The income limit for age related allowances has been increased to £18,300. The government has announced that age related allowances will be raised at least in line with earnings rather than prices for the remainder of this Parliament.

The married couple’s allowance, on which tax relief is given at only 10%, remains available only to couples where at least one spouse was aged 65 or over before 6 April 2000.

Pensions

The maximum earnings for which tax allowable pension contributions can be made is increased from £97,200 to £99,000 from 6 April 2003.
Action points

Under the current pensions regime, individuals can contribute £3,600 (gross) per year with no link to earnings. This makes it possible for non-earning spouses and children to make substantial contributions to pension schemes.

Higher levels of contribution require a link to earnings. However, earnings in one year can be used as the basis of contributions for that year and the next five. This rule allows a company to pay remuneration in one year and dividends in the following five. This in turn enables a director/shareholder to make personal pension contributions every year and the company and individual to save national insurance.

As announced in the November 2002 Pre-Budget Report, proposals for the radical reform of the taxation of pensions have been published. The plan is to scrap the existing eight tax regimes for pensions and replace them with a single set of rules that would include:
  • a single lifetime limit on the pension fund (including contributions and investment growth) of £1.4 million at retirement
  • an overall annual contribution limit of £200,000
  • an increase in the age at which pensions can start to be drawn to 55.
Comment

The proposed start date of April 2004 for these changes may prove to be a little ambitious in the light of the radical reforms proposed.

Some familiar features of the existing regime are expected to remain, namely, tax relief at the marginal rate on pension contributions and the prospect of a tax-free lump sum equal to 25% of the fund when benefits are drawn. However other features such as the carry back of contributions to the previous tax year are likely to be abolished.


Pensioners

The government confirmed its intention to introduce a Pension Credit from October 2003 to reward pensioners with low and modest incomes. The pension credit will bring pensioners’ incomes up to a guaranteed minimum entitlement. Other measures include an extra £100 on top of the £200 winter fuel payment, to households with a pensioner aged 80 or over.

Charitable giving

As announced in last year’s Budget, higher rate taxpayers making donations under the Gift Aid Scheme can, from 6 April 2003, relate the higher rate tax relief back to the previous year.

Further incentives are planned to take effect in 2004 including allowing taxpayers to nominate a charity to receive all or part of a tax repayment that is due to them.

New Child Tax Credit

The new Child Tax Credit was introduced on 6 April 2003 to replace the old Children’s Tax Credit. The new credit which is means tested is potentially available to families who have responsibility for one or more children. The old credit operated by reducing tax liabilities. The new credit is paid direct to the main carer. There are several elements to the credit but broadly the maximum is an annual amount of £1,445 per child together with a family element (one per family) of £545 per annum.
Comment

The new credit has already been criticised for its complexity. However it is estimated to apply to nine out of ten families. Some credit is likely to be payable for 2003/04 if a family’s income is less than £58,175 a year, or £66,350 if there is a child under one year old.

Action point

Only a limited period of backdating of claims is possible. Make sure that claims for 2003/04 are made no later than 5 July 2003 so that the full credit is available.


New Working Tax Credit

A new Working Tax Credit has been introduced designed to reward the work of people on low incomes whether or not they have children. It also provides working families with assistance to help meet childcare costs.

Child Trust Fund

A new Child Trust Fund has been introduced for all children born from September 2002. The government will provide an initial endowment of £250 (£500 for low income families). Other features of the fund will include:

  • allowing additional contributions to be made by others (family and friends) of up to £1,000 a year
  • accessible at age 18
  • delivered through open market competition.

Other family friendly changes

New maternity and paternity rights have been introduced. From April 2003, the standard rate of Statutory Maternity Pay has been increased to £100 per week (or 90% of weekly earnings if lower) and the duration of paid leave has been extended from 18 to 26 weeks. In addition, two weeks paternity leave has also been introduced, paid at the same standard rate as Statutory Maternity Pay.

A further reform now allows parents of young children and disabled children to request a flexible working pattern and employers face a new duty to consider such applications seriously.

Adoption

From 6 April 2003 Statutory Adoption Pay and leave have been introduced. The rules closely resemble those for Statutory Maternity Pay and leave.

Payments of financial support to adopters by local authorities or adoption agencies will continue to be free of tax under new legislation. Previous payments were exempt under an Inland Revenue concession.

Income tax exemption for foster carers

Under a long-standing administrative arrangement, foster carers have been treated by the Inland Revenue as having a taxable profit only if they receive payments which their local authority identifies as a ‘reward’.

The government has now announced an income tax exemption for foster carers with gross receipts below a certain level. The exemption takes effect from 6 April 2003. Where receipts exceed the exemption threshold, carers can either compute their profits in the normal way or treat the amount by which their gross receipts exceed the threshold as their taxable profit. The threshold consists of two elements. Firstly a fixed amount which is set at £10,000 for 2003/04 and secondly an additional amount per child which in 2003/04 will be £200 per week for a child aged under 11 and £250 per week for a child aged 11 or over.

Domicile and residence

The Chancellor announced a continuing review of the complex rules on residence and domicile. Basically an individual’s country of domicile is the country they regard as their natural home. Residence on the other hand is determined by reference to the country where an individual normally lives or makes regular significant visits. Reform is proposed on the grounds that the current rules have developed over the past 200 years and are complex and poorly understood. The government believes that the review:

  • should ensure a fair tax system
  • should assist development in the global market for skilled individuals and entrepreneurs
  • ensure clarity and transparency.

The consultation document concludes with a list of issues on which the government would welcome comments, and which it intends to use as a framework for further analysis and debate.