Tax Changes 2008Posted on: 30 April 2008 by Gareth Hargreaves
How the new income tax rates will affect you and what you can do to minimise your tax bill.
We explain the changes that came into force on 6th April 2008, and ask Andy Hardy, a TaxCalc director and former tax inspector, for advice on how to tidy up your tax affairs.
The basic rate of tax has been reduced from 22 to 20 per cent but the 10 per cent starting rate of tax has been abolished so some people on lower incomes will actually be worse off.
The personal allowance for income you can have without it being taxed is £5,435, or £9,030 for 65 to 74 year olds, or £9,180 for people aged 75 and over.
The higher rate of tax begins at £41,435. In addition, National Insurance is going up for higher rate taxpayers, who must now pay 11 per cent on earnings up to £40,040 a year before the NI payable falls to 1 per cent.
Put Away A Pension
If you can afford to, it's wise to put more money into pension contributions and share schemes.
When paying into a pension, basic tax relief has gone down by 2 per cent in line with income tax. If you're a basic rate taxpayer and for example you pay £80 into a pension scheme then your pension company has to pay £20 in, so your total contribution is worth £100 even though you've only put in £80, so you get your 20 per cent tax relief this way.
However if you are a higher rate taxpayer then you're due an extra 20 per cent which you get via the tax return, so remember to claim it.
When drawing a pension, it's never a good idea to decide how to invest your lump sum purely for tax reasons, because if you receive less income capital you can actually be worse off than by getting a higher capital on which you pay tax, so everybody needs to look at the commerciality of the investment as well as its tax status.
Check Your Tax Payment
An important point that people often miss when they focus on the tax return, is that most taxpayers don't receive one. Around 9 million people receive a return out of nearly 32 million taxpayers, while there are about 23 million people taxed through Pay As You Earn (PAYE).
Those on PAYE are reliant on HMRC getting it right. Although over 95 per cent of calculations were correct last year according to the National Audit Office, that leaves around a million people paying the wrong amount of tax. While some people paid too little last year, more than 500,000 people paid too much, leaving them on average £290 out of pocket.
So check your tax code. If it turns out that the calculations are wrong, contact your tax office.
Prepare To Pay On Time
Those paying tax under self-assessment need to know how much their bill is going to be, then they can plan their cashflow, save the money and pay in time.
If you leave the calculation to HMRC then they are guaranteed to tell you how much you owe by 31st January, when you will have to settle your bill. If you don't know how much you are going to have to pay then you receive the calculation in January, you may not have enough time to ensure the cash is available to pay.
You might as well fill in your tax return and let HMRC do the calculation, because it's a lot easier. Paper returns must be at the tax office by 31st October, but it's simpler to send your tax return over the internet as all the software and online forms will calculate your tax liability for you.
Unpaid tax starts accruing interest from 1st February. There is a five per cent penalty charge on all tax still owed on 28th February. This surcharge is repeated in July.
You will be charged an automatic £100 penalty if the paper return arrives after 31st January or if HMRC have not received your return by 28th February.
Filling In The Return
There are some changes to the actual tax form this year, so read it carefully.
Many people have some investments overseas with foreign banks. If these total less than £300 you can actually include them on your main tax return. It does mean that you won't receive tax credits but if you're a basic rate taxpayer that's probably not applicable, and often with very small amounts people might think the reduction in tax is worth it for the ease of not having to complete separate paperwork.
Meet The Expert
Andy Hardy is Development Director at TaxCalc.com and a former senior executive at the HMRC, with over 30 years industry experience.
If you are filling in a tax return, you can calculate your bill in advance using software such as TaxCalc. They have a helpline too.
Tax calculation software is one way to check the tax you pay. TaxCalc allows more than one user, so if you are using such a program because you are self-employed, your husband or wife can also enter his or her information to check their tax.
www.taxcalc.com - UK taxation software
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