Income Tax and Personal Savings - Budget Report 2004

Income Tax and Personal Savings

Income Tax Rates
Rates for 2004/05 are as follows:
	2004/05	2003/04
Starting rate band to	£2,020	£1,960
Tax rate	10%	10%
Basic rate band - next	£29,380	£28,540
Non-savings rate	22%	22%
Savings rate	20%	20%
UK dividend rate	10%	10%
Higher rate - income over	£31,400	£30,500
Tax rate excluding UK dividends	40%	40%
UK dividend rate	32.5%	32.5%
Trusts
Tax rate excluding UK dividends	40%	34%
UK dividend rate	32.5%	25%

Personal Allowances
Rates for 2004/05 are as follows (ages are as at the end of the tax year):
		2004/05	2003/04
Allowances that reduce taxable income		£	£
Personal allowance	under 65	4,745	4,615
	65 to 74*	6,830	6,610
	75 and over*	6,950	6,720
Allowances that reduce tax
Married couple's allowance (MCA)
Age of elder spouse	under 75*	572.50	556.50
	75 and over*	579.50	563.50
	minimum	221.00	215.00
The age-related allowances are progressively withdrawn if income exceeds		£18,900	£18,300
Minimum PA		£4,745	£4,615
Minimum MCA tax reduction		£221	£215
Tax Shelters
Enterprise Investment Scheme (EIS) up to		£200,000	£150,000
Venture Capital Trust (VCT) up to		£200,000	£100,000
* Higher allowances for those aged 65 or more are scaled back when income exceeds £18,900 (2003/04, £18,300). MCA is only available where at least one spouse was born before 6 April 1935.

Pensions

The cap on earnings, applied in calculating maximum contributions allowed for personal and occupational pension schemes, has been increased for 2004/05 from Ł99,000 to Ł102,000.

On 6 April 2006 the existing eight tax regimes for occupational and personal pension schemes will be replaced by one new regime with two key features:

a single lifetime allowance restricting the amount of pension saving that can benefit from tax relief. This has been set at Ł1.5 million on introduction and will rise in 2007 to Ł1.6m, in 2008 to Ł1.65m, in 2009 to Ł1.75m and in 2010 to Ł1.8m. Funds will be measured against the lifetime allowance when they are brought into payment, with a 25% charge on the excess, unless this is taken as a lump sum in which case the tax charge will be at 55%.

an annual allowance, initially set at Ł215,000 but increasing each year, to Ł255,000 in 2010. There will be a charge at 40% on excess contributions or increases.

Transitional rules provide a measure of security for those whose pension savings already exceed the lifetime allowance.

Lloyd's underwriters

As announced on 9 April 2003, the reliefs available on incorporation of a business will be extended to underwriters transferring their activities to a company or Scottish Limited Partnership on or after 6 April 2004. Thus underwriters will be able to carry forward income tax losses against future income from the company (or profits from the partnership) and net gains on the transfer of assets to the company can be held over.

Landlords

A residential landlord is not normally allowed to deduct from rents for income tax purposes the cost of any improvements made to a let property. With effect from 6 April 2004, a deduction can be made for the cost of loft or cavity wall insulation up to a maximum of Ł1,500.

Jointly owned shares in close companies

A change aimed at reducing exploitation by the use of the current rules on assets jointly held by husband and wife to reduce tax means that from 6 April 2004 income distributions (e.g. dividends) from jointly owned shares in close companies will be taxed by reference to the actual ownership/entitlement, not the previously automatic 50:50 split which applied in many cases.

Taxation of trusts

Although further changes are expected to be announced in the 2004 pre-budget report, some changes to the taxation of trusts have been confirmed.

From 6 April 2004, the income tax rate applicable to discretionary and accumulation and maintenance trusts has been increased from 34% to 40% on most income, from 25% to 32.5% on UK dividend income.

From 6 April 2005 a new basic rate will apply to the first Ł500 of income of trusts to which the trust rate applies.

Changes to be confirmed in 2005 and backdated to 6 April 2004 will mean that trustees of trusts for the vulnerable will be able to use the individual beneficiary's personal allowances and starting/basic rate bands rather than initially account for tax at the rate applicable to trusts.

Immediate needs annuities

It was believed that annuities purchased to fund the costs of long term care were not taxable - this has now been confirmed, with a consequential effect on the calculation of insurance companies' profits for tax purposes.

Foreign earnings deduction

Workers on offshore installations are excluded from claiming the foreign earnings deduction due to certain seafarers. The statutory definition of 'offshore installation' is to be changed, effective 6 April 2004, to ensure the deduction continues to be available only to those for whom it was intended.

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How sure are you that your savings will be adequate for your retirement? Many people face potential poverty in retirement as a result of not saving enough in their working lifetimes.