BUDGET 2005 Income Tax and Personal Savings

Income Tax Rates
Rates for 2005/06 are as follows
  2005/06 2004/05
Starting rate band to £2,090 £2,020
  Tax rate 10% 10%
Basic rate band - next £30,310 £29,380
 Non-savings rate 22% 22%
 Savings rate 20% 20%
 UK dividend rate 10% 10%
Higher rate - income over £32,400 £31,400
  Tax rate excluding UK dividends 40% 40%
  UK dividend rate 32.5% 32.5%


Personal Allowances
Rates for 2005/06 are as follows (ages are as at the end of the tax year)
  2005/06 2004/05
Allowances that reduce taxable income £ £
Personal allowance under 65 4,895 4,745
  65 to 74* 7,090 6,830
  75 and over* 7,220 6,950
Allowances that reduce tax
Married couple's allowance (MCA)
Age of elder spouse 71 to 74 590.50 572.50
  75 and over* 597.50 579.50
  minimum 228.00 221.00
* Higher allowances for those aged 65 or more are scaled back when income exceeds £19,500 (2004/05, £18,900). MCA is only available where at least one spouse was born before 6 April 1935.


Employees in full time education

The Chancellor announced improvements to the rules covering payments by employers to employees in full-time education at universities and technical colleges. The revised Statement of Practice means that payments of up to £15,000 can be paid free of income tax and Class 1 NICs for the academic year beginning on 1 September 2005.

Tax exemption for members of the Armed Forces

Benefits payable from 6 April 2021 under the Armed Forces pension, compensation and early departure schemes as a result of medical unfitness caused or aggravated by service in the Armed Forces will be tax exempt for those remaining in, as well as those leaving, the Forces.

Outplacement counselling and training expenses

The tax exemption for the provision of counselling and training by employers to employees who have lost their jobs will be extended, from 6 April 2005, to cover part-time employees. Further changes are that the duration of the course can now be up to two years, and it need no longer be full-time or substantially full-time.

Tax and civil partners

The Civil Partnerships Act comes into force on 5 December 2005. There are a number of consequent changes to tax rules, which also take effect from that date, including:

Inheritance tax

Lifetime transfers and transfers on death between civil partners will be exempt.

Capital gains tax

A couple may have only one principal private residence at any time.

Transfers between civil partners living together will be on a no-gain, no-loss basis.

Income tax

Civil partners will be taxed on jointly owned assets in the same way as married couples, with the right to elect that income from jointly owned assets is taxed on a beneficial ownership basis, rather than the normal 50:50 basis.

Where one partner was born before 6 April 1935, the married couple's allowance will be available - based on the age of the elder partner and the income of the partner with the higher income.

Pension schemes

Current and future pension tax legislation will reflect the civil partnership.

Stamp Duty

The current exemptions for stamp duty and Stamp Duty Land Tax on divorce will be mirrored for the dissolution of a civil partnership.

General

Civil partners will obtain many of the tax advantages of married couples but will also be caught by many of the rules attacking tax avoidance, including those governing settlements and the transfer of assets abroad. They will also be 'connected persons' for the purposes of capital gains tax, and 'associates' for the company control tests.

Individual Savings Accounts

The current limits of £7,000 overall including £3,000 for cash on annual investment in ISAs have been extended to 5 April 2010.

Further, the qualifying investment rules are to be extended, with effect from no later than 6 April 2006. This measure also affects Child Trust Fund account holders.

Pensions

The cap on earnings, applied in calculating maximum contributions allowed for personal and occupational pension schemes, has been increased for 2005/06 from £102,000 to £105,600. As previously announced, on 6 April 2021 the existing eight tax regimes for occupational and personal pension schemes will be replaced by one new regime.

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