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Tax Cut to 20%, is it Really?

Newsletter issue - April 07.

Gordon Brown wanted his last Budget to be remembered for the dramatic cut in the basic rate of income tax from 22% to 20%, but most taxpayers will see little benefit from this tax reduction, due to the tax increases which will come in at the same time. Some points to note...

  • Wait a Year - we have to wait for over a year for the new 20% tax rate as it does not take effect until 6 April 2008. On the same day the 10% tax band will disappear for earned income, and the upper income limit for the main rate of national insurance (11% for employees) will increase to approximately £40,000. As a result of all these changes a single person on a salary of £15,000 will pay about £72 more in tax per year, but someone currently in the upper tax bracket on a salary of £45,000 will reap a net saving of £390 per year. These figures do not take account of any working or child tax credits the individual may be able to claim.
  • Rental Income - if you receive most of your income in the form of rents, you could be one of the winners from the cut in the basic rate of income tax from 2008. As rents do not attract national insurance, the reduction in the tax rate is not cancelled out by the increase in national insurance as it is for earned income.
  • Pension Contributions - the new 20% band will have a knock-on effect on personal pension contributions. Currently if you want your pension fund to receive £4,000 you make a contribution of £3,120 net of 22% tax, and the pension scheme reclaims £880. From 6 April 2008 to achieve the same payment into your pension fund, you will have to pay £3,200 net of 20% tax, and the pension scheme will reclaim £800. So you end up paying £80 more into your pension scheme for the same result.
  • Charities - will also be hit hard by the reduction in the basic rate. At present when you make a charitable gift of £100 and certify it under the gift aid scheme, the charity can claim back a further £28.20 from the Government. From 6 April 2008 the same gift of £100 will only be worth £125 to the charity, so they will lose £3.20 of income for every £100 of gift-aided donations.
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