Budget 2006 - Summary of changes to tax rates and allowances

   

The Chancellor announced his yearly changes to rates and allowances today - we've provided summaries of the main changes below. You can view the key tax rate tables for 2006/7 in our dedicated Tax Rates section.

Income Tax Rates & Allowances

The income tax starting rate limit and basic rate limit are to increase in line with indexation to £2,150 and £33,300 respectively.

From 6 April 2006 the new pensions tax regime comes into effect. This means that the pension schemes earnings cap ceases to exist. From April 2006 there will be two controls on an individual's tax-relieved pension savings: the Annual Allowance (starting at £215,000 for 2006-07) and the Lifetime Allowance (starting at £1,500,000 for 2006-07).

National Insurance

The starting point for employers’, employees’ and self-employed NICs in 2006-07 will increase in line with inflation to £97 per week. NICs are not paid on earnings or profits below this amount. The upper earnings and profits limits for NICs will increase from April 2006 in line with inflation from £630 to £645 per week (£33,540 per year). For the self-employed, the rate of Class 2 contributions will be frozen at £2.10 per week.

• Read our National Insurance Guide for Small Businesses

The capital gains tax (CGT) annual exempt amount is increased in line with statutory indexation to £8,800 for the tax year 2006-07 for individuals, personal representatives of deceased persons and trustees of certain settlements for the disabled. The annual exempt amount for most other trustees is increased to £4,400.

Every husband, wife, civil partner and child has his or her own £8,800 annual exempt amount.

The amount chargeable to CGT is added to the individual’s income liable to income tax and treated as the top part of that total. For 2006-2007, CGT up to the starting rate limit will be charged at 10 per cent, between the starting rate and basic rate limits at 20 per cent, and above the basic rate limit at 40 per cent.

Inheritance Tax

The inheritance tax threshold is increased to £285,000 for the tax year 2006-07. The value of estates above the threshold is taxed at 40 per cent. The threshold will be £300,000 in 2007-08, to £312,000 in 2008-09 and £325,000 in 2009-10.

Corporation Tax

The corporation tax main rate remains at 30 per cent. The non-corporate distribution and starting rates will be replaced with a new single banding for small companies set at the existing small companies’ rate. The small companies’ rate will therefore apply to companies with taxable profits between £0 and £300,000, and will be 19 per cent in 2006-07. The corporation tax main rate for 2007-08 will also be 30 per cent.

Marginal relief eases the transition from the small companies’ rate to the main rate for companies with profits between £300,000 and £1,500,000. The fraction used in the calculation of this marginal relief will be 11/400.

The profits limit may be reduced for a company that is part of a group or has associated companies. The small companies’ rate and marginal relief do not apply to close investment holding properties.

Stamp Duty

The starting threshold for residential stamp duty is increased to £125,000 from 23 March 2006. Other rates and thresholds remain unchanged, including the £150,000 residential threshold in the 2,000 Enterprise Areas.

Tobacco duties

Duty on cigarettes will rise by 9p.

Alcohol duty

Wine is up by 4p, and Beer by 1p per pint. Duties on sparkling wine, sprits and cider are frozen.

Fuel duty

The Chancellor announced an inflation based increase in main fuel duties for 2006-07 but because of continuing oil market volatility the changes in rates will be deferred until 1 September 2006.

Vehicle excise duty (VED)

The Government has announced the introduction of a new higher band of Graduated VED (band G) for the most polluting new vehicles (those above 225g of CO2 per kilometre) registered after 22 March 2006, set at £210 for petrol cars, and the reduction of the VED rates for small number if cars with the very lowest carbon emission (band A) to £0 to assist the development of the low carbon car market.

VED rates will also be reduced for bands B and C by £35 and £5; frozen for bands D and E; and increased by £25 for band F. Rates for pre-2001 registered cars and light goods vehicles in the lower band will be frozen with the higher band increased by £5.

Fifty per cent of vehicles will see their VED frozen or reduced.

You can view the tax rate tables for 2006/7 in our Tax Rates section.