UK: Budget Summary: Personal Taxes

Last Updated: 22 March 2000
  • Income tax rates and allowances

Personal allowances

 

2000/01

1999/00

Personal allowance

 

£

- under 65

4,385

4,335

- 65 to 74

5,790

5,720

- 75 or over

6,050

5,980

Income limit for age allowance

17,000

16,800

Blind person’s allowance

1,400

1,380

Tax bands

2000/01 Band of taxable income

Exceeding

Not exceeding

Rate

Tax on full band

Cumulative tax

£

£

%

£

£

0

1,520

10

152

152

1,521

28,400

22

5,941

6,066

28,400

 

40

 

 

1999/00 Band of taxable income

Exceeding

Not exceeding

Rate

Tax on full band

Cumulative tax

£

£

%

£

£

0

1,500

10

150

150

1,501

28,000

23

6,095

6,245

28,000

 

40

 

 

  • NIC rates and allowances
     

    2000/01

    1999/2000

    Class 1 (earnings related)

     

     

    Lower earnings limit (per week)

    £67

    £66

    Upper earnings limit (per week - employees only)

    £535

    £500

    Primary threshold (per week - employees)

    £76

    N/A

    Secondary threshold (per week - employers)

    £84

    £83

    Rate: Employee

    10%

    10%

    Rate: Employer

    12.2%

    12.2%

    Class 1A

     

     

    Will not apply to childcare provided as a B-I-K

     

     

    Class 2 (self-employed flat rate)

     

     

    Per week

    £2.00

    £6.55

    Small earnings exception (per year)

    £3,825

    £3,770

    Class 3 (voluntary)

     

     

    Per week

    £6.55

    £6.45

    Class 4 (self-employed profit-related)

     

     

    Rate

    7.0%

    6.0%

    Lower profits limit (per year)

    £4,385

    £7,530

    Upper profits limit (per year)

    £27,820

    £26,000

For 1999/2000 employees’ contributions are payable on that part of earnings which falls between the lower earnings limit and the upper earnings limit. For 2000/01 they will be payable on that part of earnings which falls between the primary threshold and the upper earnings limit. The lower earnings limit will no longer have any effect on the employee contributions actually paid but, for the purpose of certain benefit entitlements which depend on contributions, the employee will be treated as having paid contributions on earnings between that figure and the primary threshold.

The rates of NICs on earnings below the upper limit are reduced where the employee is contracted out. The reduction for employees is 1.6%. The reduction for employers depends upon the type of scheme.

  • Individual Savings Accounts (ISAs)

The overall limit for subscription into ISAs remains £7,000 for a further year.

  • Company cars

The Chancellor has previously announced his intention to reform the company car regime, reduce the driving of unnecessary business miles, and encourage the use of cars with low emissions.

The new system will commence on 6 April 2002. The calculation of the tax charge will still be based on a percentage of the price but graduated according to the car’s carbon dioxide (CO2) emissions. Broadly this graduated rate will range from 15% to 35% of the car’s price.

Company car fuel scale rate benefits

 

2000/01

1999/00

 

Petrol

Diesel

Petrol

Diesel

 

£

£

£

£

1400cc or less

1,700

2,170

1,210

1,540

1401cc to 2000cc

2,170

2,170

1,540

1,540

2001cc or more

3,200

3,200

2,270

2,270

  • Share schemes

Following a period of consultation, the Chancellor has announced revised details of the All Employee Share Ownership Plan. The plan is designed to be flexible, and promote the competitiveness of companies through share ownership. There are opportunities to link the provision of shares to performance. Generally, in order to qualify for any relief, the shares have to be held for a period of at least three years.

Broadly, the scheme allows employers to give up to £3,000 of shares free of tax to employees per year (linked to performance if desired).

Additionally, the employee can buy up to £1,500 worth of ‘partnership shares’ per year from pre-tax salary, free of tax and NIC. The company can match these shares with further free shares up to a maximum of two for one.

If shares are retained within the scheme

  • for five years, then the employee will pay no NIC or income tax on those shares;
  • for three years, income tax and NIC are payable only on the initial value of the shares.

The scheme must be open to all UK resident and ordinarily resident employees, subject to a minimum qualifying period of no more than twelve months.

  • The scheme has a number of other features, broadly as follows:
  • Shares held in QUESTS on 21 March 2000 can be transferred to a new plan trust without the loss of the original corporation tax relief.
  • Up to £1,500 of dividends on shares in the plan may be reinvested in shares tax free each year.
  • Free and matching shares must be held in the plan for at least three years. They may be forfeited if the employee leaves the company during this period, unless leaving for certain specified reasons, such as redundancy or retirement.
  • Employees who leave their job before the end of the five year period will have to remove their shares from the scheme, and thus pay income tax and NIC, unless leaving for certain specified reasons, such as retirement or redundancy.
  • Employees can withdraw the shares they have purchased at any time (but this may have implications on any matching shares which the company has given to the employee).
  • Employees who take their shares out of the plan after three years will be liable to capital gains tax on any increase in value after the shares come out of the plan.
  • Employers can operate PAYE and account for NIC on behalf of the trust.
  • The costs of setting up and running the plan, and the market value of the shares when put into the plan, are deductible when computing the company’s taxable profits.
  • Roll over relief will be available for existing shareholders who want to sell their shares into a new plan trust.

The rules for SAYE Sharesave and the Company (Approved) Share Option Plan will remain as they are. Approved Profit Sharing schemes are available alongside the new schemes until 2002 but will then need to be transferred into new plans to retain their tax breaks. In addition, from 21 March 2000 rules are introduced to stop APS schemes replicating the original PRP schemes.

Comments have also been requested on suggestions made to reduce the employers’ NIC exposure on gains arising on the exercise of share options, by making it possible for some or all of the liability to be borne by the employee.

  • Personal service companies

The Inland Revenue have already announced detailed proposals concerning personal service companies. These proposals are given legislative effect from April 2000.

The legislation is designed to cover the provision of services through an intermediary company, where if the individual provided those services directly the payment would have been treated as arising from an employment. There are exemptions to cover cases where:

  • the client is an individual and not in business (e.g. where services are performed for householders)
  • the worker receives income only in the form of wages or salary and (broadly) has no significant right to dividend income.

Under the legislation, any income arising from engagements which would have been treated as arising from an employment, which is paid to the company and not paid on to the individual as salary, will be deemed to have been paid as salary at the end of the tax year. PAYE and NIC will be due in the normal way.

Once the deemed payment has been made, and PAYE and NIC accounted for, no further tax is due when the employee withdraws cash from the company.

In calculating the amount which is deemed to have been paid at the end of the tax year, the company is allowed to deduct certain expenses:

  • expenses eligible for deduction under the rules applicable to employees (not the rules applicable to companies)
  • employer pension contributions which are allowable under the normal rules
  • a further flat rate 5% of the gross payment received to cover other miscellaneous expenses, such as the company’s running costs
  • the amount of any employers NIC paid during the year, including any on the deemed payment.

Similar rules apply where the intermediary is a partnership rather than a company.

  • Enterprise Management Incentives

The Chancellor confirmed in the Budget the introduction of ‘Enterprise Management Incentives’ (EMIs). The aim of the legislation is to allow independent small companies to recruit and retain key staff.

Broadly, in order to qualify, the company’s gross assets must not exceed £15m. EMIs operate by allowing

  • a maximum of fifteen employees
  • to hold share options worth up to £100,000 each at the date of the grant
  • in a quoted or unquoted independent company trading in the UK (other than in a financial trade).

There is no scheme approvals procedure, and

  • there will normally be no tax or NIC payable by the employee when the options are granted or exercised, and normally no employer NIC; and
  • the shares will normally qualify for business assets taper relief in the employees’ hands, and this relief will start from the date the options are granted, rather than the date the shares are acquired.
  • Pensions

Pension schemes earnings cap increased from £90,600 to £91,800.

  • Capital gains tax

The annual exempt amount for capital gains tax for 2000/01 will be £7,200 for individuals and £3,600 for most trusts.

From 6 April 2000, the 10% starting rate band will apply to capital gains tax, to the extent that it has not already been utilised against taxable income.

Gifts relief

As previously announced, gifts relief on the transfer of shares or securities to companies by individuals and trustees is withdrawn, for transfers on or after 9 November 1999.

Taper relief

The holding period for taper relief for business assets will be reduced from 10 years to 4 years for assets disposed of after 5 April 2000. Taper relief will apply as follows:

No. of complete years asset held (after 5.4.98)

Percentage of gain chargeable %

Equivalent rate for higher rate taxpayer %

1

100

40

2

87.5

35

3

75

30

4

50

20

over 4

25

10

The present thresholds for shareholdings in unquoted and quoted trading companies of 5% for full-time employees and 25% for others will be reduced so that the following shareholdings will qualify as business assets:

  • all shareholdings held by employees (including part-time employees) and others in unquoted trading companies;
  • all shareholdings held by employees (including part-time employees) and others in quoted trading companies;
  • shareholdings in a quoted trading company where the holder is not an employee but can exercise at least 5% of the voting rights.

For non-business assets, the existing 10 year taper will continue to apply.

  • Inheritance tax

The death rate for inheritance tax remains at 40%.

The lifetime rate (for gifts to companies and discretionary trusts) remains one half of the death rate at 20%.

The threshold for inheritance tax is increased to £234,000 from £231,000, for charges arising on or after 6 April 2000.

For further information, speak to your usual KPMG tax contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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