BUDGET 2006 Income Tax and Personal Savings

Income Tax Rates
Rates for 2006/07 are as follows
  2006/07 2005/06
Starting rate band to £2,150 £2,090
  Tax rate 10% 10%
Basic rate band - next £31,150 £30,310
 Non-savings rate 22% 22%
 Savings rate 20% 20%
 UK dividend rate 10% 10%
Higher rate - income over £33,300 £32,400
  Tax rate excluding UK dividends 40% 40%
  UK dividend rate 32.5% 32.5%

Personal Allowances
Rates for 2006/07 are as follows (ages are as at the end of the tax year)
  2006/07 2005/06
Allowances that reduce taxable income £ £
Personal allowance under 65 5,035 4,895
  65 to 74* 7,280 7,090
  75 and over* 7,420 7,220
Allowances that reduce tax
Married couple's allowance (MCA)
Age of elder partner 72 to 74* 606.50 590.50
  75 and over* 613.50 597.50
  minimum 235.00 228.00
* Higher allowances for those aged 65 or more are scaled back when income exceeds £20,100 (2005/06, £19,500). MCA is only available where at least one partner was born before 6 April 1935.

Landlord’s energy saving allowance

The allowance enables landlords to claim an income tax deduction against rental income for the cost of loft or cavity wall insulation in a dwelling they let. The Chancellor announced that with effect from 6 April 2021 the deduction will also apply to the cost of draught proofing and insulation for hot water systems.

Computers and mobile phones

Employees with the private use of a computer provided by their employers have been exempt from tax on the first £500 of annual benefit in kind. This exemption is to be withdrawn, with effect from 6 April 2006.

In addition, the exemption on the private use of employer-provided mobile phones will be restricted with effect from 6 April 2006, to cover one phone per employee.

Further measures were announced:

  • to ensure that no charge to tax will arise if the mobile phone is provided under a salary sacrifice scheme, and
  • to exempt from tax and NICs the provision of a mobile phone through the use of vouchers, so long as any phone so loaned would have been exempt if the voucher had not been used.

Eye tests and glasses - VDU users

Employees using VDUs are entitled to have the cost of eye tests and glasses for VDU use paid for by their employers.

To ensure that no tax charge under the benefit in kind or voucher rules arises, the lists of exempt benefits and vouchers will be amended with effect from 6 April 2021 to cover the position whether the cost of the tests and glasses is paid direct to the provider, or by reimbursing the employee for the cost, or by the provision of a voucher.

Pensions –'A' Day – 6 April 2021

As announced prior to today’s Budget statement there are widespread changes which come into effect on 6 April 2006.

From ‘A’ day there is no limit on the amount that may be contributed to a registered pension scheme. The maximum amount on which an individual can claim tax relief in any tax year is the greater of the individual’s UK relevant earnings or £3,600.

If total pension input exceeds the annual allowance of £215,000 there is a tax charge at 40% on the excess. This limit does not apply in the year that full pension benefits are taken.

Maximum age for tax relief 74
Minimum age for taking benefits 50
Lifetime allowance charge - lump sum paid 55%
                                      - monies retained 25%
on cumulative benefits exceeding £1,500,000*
Maximum tax-free lump sum 25%*

* subject to transitional protection for excess amount

Under the original rules applying from 6 April 2006, those applying for Enhanced Protection under the new pension rules would have been denied that protection if they had an ongoing term assurance (life cover) policy written under pension rules (sometimes referred to as section 226A and section 621 policies) or belonged to schemes which include stand-alone entitlements to death benefits. Finance Bill 2006 will contain confirmation that the continuing existence of these arrangements will not deny Enhanced Protection.

It will be recalled that the Chancellor announced, in the 2005 Pre-Budget Report, that the rules for self-directed pension schemes would remove the tax advantages for investments in residential property and certain other assets - such as fine wines, classic cars, art and antiques.

It is also worth noting:

  • that the rule preventing recycling of tax-free lump sums will not, under current proposals, be triggered where no more than 30% of the lump sum is recycled, and
  • that the threshold under which lump sums of less than £15,000 will not trigger the rule will be linked to the standard lifetime allowance.

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