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Does anyone know the tax rate? By Taxdog

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13th Mar 2008
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DogA dog that blogs and a vexing question of semantics...

Was it me getting things wrong in my furry little head or did the 2007 budget commentators (including the Treasury) get Gordon Brown’s 2007 announcement on tax rates wrong? I have been chasing my tail over this one, and then, to add to my confusion, his successor Alastair Darling does not seem to have noticed, in fact he has contributed further...

Recent research apparently shows that a third of small business owners do not realise that company tax has increased since 2007. The same research says that all their dogs not only knew about the rate changes but could also say "I like boneo" in Mandarin Chinese, - not really I made up the dog part.

As far as I can see from my basket about 99% of those commentating on last year’s budget, seem to have got Mr Brown’s income tax rate changes for 2008/09 wrong. So mesmerised by the chancellor’s display of 'smoke and mirrors' that they seem to have misread the budget notes? It looks like the Treasury did too, or were they all trying to say something else?

Chancellor Brown said in his 2007 budget speech "... I can now return income tax to just two rates by removing the 10p band on non savings income... thereby creating a tax system for income that has just two rates and two thresholds."

He was talking about tax on earned and pension income, not savings and investment and capital taxes, even a mutt can see that. Despite whatever he was trying to say, there are still more than two rates to income tax, as the 2007 budget note, detailing the measure reveals:

2007 Budget Notes

BN01
Modernising The Personal Tax System
Who is likely to be affected?

  • All taxpayers and payers of National Insurance Contributions (NICs).
  • General description of the measure:

  • The basic rate of income tax will be reduced to 20% from 2008-9.
  • The starting rate will be removed for earned income and pensions but will continue to be available for savings income and capital gains. There are no changes to the rates applicable to dividends.

The 'starting rate' is the 10% income tax band, and this still clearly applies for savings and dividend income (but not for gains as following the 2007 pre-budget report whereby gains are now to be taxed at 18%).

The Treasury meanwhile told us that it meant this:
"Budget 2007 announces the next stage in the government’s reforms to simplify the tax system, to provide help for pensioners, support families and make work pay. The government will:

  • remove the 10p starting rate of income tax and cut the basic rate of income tax from 22p to 20p from April 2008"

It looks as if 2007 budget commentators took their notes from the Treasury’s website and the mistake has snowballed on from there. In fact, just about every newspaper and website said the same thing, (except for AccountingWEB.co.uk), it reported that from 6 April 2008:

  • The 10% starting rate band is abolished for earned and pension income
  • The 10% starting rate remains for savings
  • Basic tax rate reduced to 20%
  • Dividend rate remains unchanged

A debate has been on-going in recent months on AccountingWEB.co.uk on this very topic as tax practitioners struggle to keep up with past budget changes.

So you all agree that the 10% band never went away for savings? Good news for those who live on savings and investment income, but then my little brain gets confused again, in 2008 budget Alastair Darling confirms that he is abolishing the 10% band and... wait for it, introducing... a 10% band. So what we have is a 10% band, which now applies for savings, just as we thought.

Is this what you humans call tax simplification?

Dog on a beachMe, on the beach

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Replies (5)

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By AnonymousUser
19th Mar 2008 10:57

At last
That explains the situation.

I did originally think it was 10% in my example, and it was the note in the tables that made me query the treatment.

Thanks.

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By Laurence52
18th Mar 2008 19:00

Some clearer explanation of the 10% band
The ICAEW Tax Faculty have issued their Budget Report which shows how the 10% savings band operates.

ITA 2007 sets out the order in which sources of income are taxed: firstly non savings income, secondly savings income, then dividends. The example given is of a 75 year old single pensioner with a state pension of £4540, other pension £6000, gross interest £1000, gross dividend £100. So non-savings income is 4540 + 6000 - PA 9180 = £1360.

So the non-savings income of £1360 is taxed at 20%. As far as the savings income is concerned, £1360 of the £2320 10% band has been used up by the non-savings income. That leaves £960 of the £1000 taxed at 10% and the remaining £40 at 20%. The dividend income is obviously taxed at 10%.

Using this basis seems to lead to the savings income being taxed at 10% in Mister E's example.

The example doesn't cover the situation I gave where the taxable income consists of savings income and the apparent loss of income if this is between £2321 and £2610..

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By AnonymousUser
18th Mar 2008 11:47

What about dividends
What about the usual case of directors taking the PA as salary plus Divs who have some bank interest as well?
For example
2008/09 Salary £5,435, Divs £20,000, plus £2,000 bank interest
is the position -
Salary covered by PA.
Divs at 10% (as usual)
Savings - 10% or 20%?

Is it 20% because overall the total taxable income exceeds the new 10% band (£2,320)
Or is it 10% as divs are always the final slice of income to be taxed so the bank interest falls into the £2,320 new 10% band.

Looking at the tax tables here and the explanation https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=180711&d=1032&h=1058&f=1026 it appears it's 20% as overall the income is above PA + £2320.

Agreed?

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By AnonymousUser
18th Mar 2008 10:24

How many can actually get the 10% rate?
Laurence, I won't be the first to contradict you. Given the conflicting statements I'll take your word for it until HMG makes it clear.

A point noted in the tax tables but not commented on in this article is that earned income is the first slice when determining the tax rate. So anyone earning more than their personal allowance plus £2320, i.e. over £8755, pays 20% on their savings. £8755 is less than the minimum wage for a full time job. So who can actually get the 10% rate? Perhaps it is aimed at pensioners, as the new Age Allowances of £9030 and £9180 will make it more likely that they will have some room left for the 10% band to apply. But again, how many pensioners with income under £11350 or £11500 have any saving to speak of?

It's a virtual tax rate, retained simply so Mr D can say he has kept it.

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By Laurence52
17th Mar 2008 15:20

Savings income 10% band
If my reading of the budget details is correct, then if your taxable savings income is not greater than £2320, your tax rate is 10%. If your taxable savings income exceeds £2320 then the normal rates apply. So if the gross was £2320 then the net income would be £2088. If the gross was £2321 then the net income would be £1856-80. The net would continue to be below £2088 until the gross exceeded £2610.

So if your taxable savings income is between £2321 and £2610, you must be tempted just to go and spend some of hte capital.

I've made this comment elsewhere on this site and no-one has yet come back to contradict me.

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