Tax Rates for 2007/08
For the eighth consecutive tax year, income tax rates remain at 10%, 22% and 40%. The special rules for savings income and dividends continue to apply.
Tax Rates for 2008/09
The government proposes to radically change the tax rates for 2008/09 onwards when the 10% starting rate will be abolished for earned and pensions income and the 22% basic rate of tax will be reduced to 20%. The higher rate of tax will continue at 40%.
The starting rate will continue to be available for savings and investment income and capital gains. There are no changes to the tax rates applicable to dividends.
There is, however, a significant sting in the tail for those with earned income. The changes in the upper earning limit for NIC (see Employment issues) will largely negate the income tax savings.
Allowances
The 2007/08 personal allowances were announced in last December's Pre-Budget Report. The personal allowance for those under 65 is £5,225.
Tax Credits
There are two types of Tax Credits; Working Tax Credit (WTC) and Child Tax Credit (CTC). The CTC is potentially available to families who have responsibility for one or more children. There are several elements to the Child Tax credit but broadly the maximum is an annual amount for 2007/08 of £1,845 per child together with a family element (one per family) of £545 per annum. The amount per child has been increased but the family element has been frozen since the introduction of the credit.
Some credit is likely to be payable for 2007/08 if a family's income is less than £58,175 a year, or £66,350 if there is a child under one year old.
In order to finalize a Tax Credits award given for the previous tax year, claimants may have to complete an annual declaration. The declaration will also renew any claim for the current year. The date for renewals of Tax Credits for 2007/08 will be 31 July 2007.

Tax Motivated Incorporation
The government has moved to discourage small businesses from incorporating for tax reasons by increasing the tax they will pay on profits up to £300,000, from 19% to 20% with effect from 1 April 2007. The small companies' corporation tax rate will further increase to 21% in 2008 and to 22% in 2009.
In contrast, the corporation tax paid by large companies with profits of £1.5 million or more will be cut from 30% to 28% from 1 April 2008. However companies with ring fenced North Sea oil and gas activities will retain the current corporation tax rates of 19% and 30%.
The effective marginal corporation tax rate for profits between £300,000 and £1.5 million is 32.5% from 1 April 2007.
However, an individual will also have to pay Class 4 national insurance on his self-employed profits. The overall effect of the measures will be to reduce considerably the tax advantages of incorporation.
Dividends however remain significantly better compared with salary and or IR35 because of the consequences of employers and employees NIC, with the employees NIC significantly increasing post April 2009.
Capital Allowances
The system of capital allowances is to be significantly revised from 2008/09. The proposals affecting contractors relate to writing down allowances for plant and machinery being cut from 25% to 20%.
In addition the following changes will be subject to consultation:
" a new investment allowance for the first £50,000 spent on plant and machinery
" where businesses have a loss after claiming 100% capital allowances on green technologies they will be able to reclaim a tax credit from HMRC.
The current 50% first year allowance for plant and machinery which can be claimed by small businesses, which was due to expire in April 2007, will be extended to April 2008. The capital allowances that can be claimed on business cars have not altered but proposed changes to the rules are being consulted on further.
Tax Relief for Business Cars
In March 2006 the government issued a discussion document about business expenditure on cars. As a result of consultation, revised proposals have been issued.
The proposals are that:
" the existing 100% first year allowances for cars with CO2 emissions up to 120g/km be retained
" the general plant and machinery capital allowances pool will be used for cars with CO2 emissions between 121 and 165g/km
" a new car pool would be introduced with a lower writing down allowance than the general plant and machinery pool for other cars.
As a consequence there would no longer need to be a specific distinction between cars costing more or less than £12,000.

National Insurance Contributions (NICs)
There is no change in the rates of NIC but there are significant proposed changes to the limits between which NICs are payable. For 2007/08 the lower and upper earnings limits (UEL) increase by inflation so that employees will pay 11% NIC on earnings between £100 and £670 per week. Employees continue to pay contributions of 1% on earnings above the UEL. For 2008/09 the UEL will be increased by £75 per week above indexation.
The upper profits limit for Class 4 national insurance for the self-employed will also be increased in 2008/09 by £75 per week above indexation.
In the following year the upper earnings limits will be aligned with the point at which the higher rate of income tax becomes payable.
Managed Service Companies (MSCs)
In 2000 the government introduced rules to tackle the provision of services through many personal service companies (PSCs). These rules have been referred to by the name of the press release of that time, IR35.
Many PSCs were designed to 'disguise employment' by interposing a company between the payer and worker. If the IR35 rules apply most of the income received by the company is deemed to be paid to the worker as employment income and PAYE and NICs are due accordingly.
MSCs attempt to avoid the IR35 rules. The types of MSCs vary but are often referred to as 'composite companies' or 'managed PSCs'. HMRC have encountered increasing difficulty in applying the IR35 rules to MSCs because of the large number of workers involved and the labour intensive nature of the work. Even when the IR35 rules have been successfully applied, an MSC can often escape payment of outstanding PAYE and NIC as they have no assets and can be wound up.
The government has confirmed that new rules will apply to MSCs. The intention of the new rules is to:
" ensure that those working in MSCs pay PAYE and NIC at the same level as other employees
" alter the travel and subsistence rules for workers of MSCs to ensure they are consistent with those for other employees
" allow the recovery of outstanding PAYE and NIC from 'specified persons' if the amounts cannot be recovered from the company.
Company Cars and the Fuel Scale Charge
Where a car is provided for an employee's private use, a taxable benefit arises which is based on the list price of the car and its CO2 emissions. The percentages range from 15% to 35% for most cars. There are currently discounts available for environmentally friendly cars and from 6 April 2008 there will be a 2% discount for cars that have been manufactured to run on E85 fuel.
If free fuel is provided for private motoring then a fuel benefit tax charge arises based on the percentage used for the car benefit which is applied to £14,400. For 2007/08 the figure will remain at £14,400.

Capital Gains Tax (CGT) Annual Exemption
The annual exemption for 2007/08 is £9,200. For most trusts the exempt limit is increased to £4,600.
CGT Rates of Tax
For individuals capital gains continue to be treated as the top slice of income. For 2007/08 rates continue to be aligned with those applying to savings income. Tapered gains are charged at 10% where gains plus taxable income do not exceed £2,230; 20% between £2,231 and £34,600; and 40% on any balance.
For trustees the rate of CGT is 40%.
Inheritance Tax (IHT) Threshold
The IHT nil rate band is increased to £300,000 with effect from 6 April 2007. The Chancellor previously announced that the band will rise to £312,000 in 2008 and £325,000 in 2009.
Homes Abroad Owned Through a Company
Individuals often purchase a property abroad by setting up a company to own the property. This is done for a variety of reasons related to the tax or inheritance laws of the country in which the asset is situated. Where the individuals direct the company's affairs (whether through an agent or not) they could be assessed on an employment income benefit in kind charge as a director of the company. Legislation will remove that tax charge where certain qualifying conditions are satisfied:
" the company is owned by individuals
" the sole activity of the company is holding the property for occupation and/or letting
" the property is the company's only or main asset
" the property is not funded directly or indirectly by a connected company.
The legislation will not be enacted until 2008 but HMRC will not seek to tax anyone in the intervening period provided the qualifying conditions are satisfied.