Tax changes for Individuals

Income Tax
The 50% rate of income tax will apply from 6 April 2010 on income above £150,000. This replaces the proposed 45% rate, which was going to come in a year later on 6 April 2011. Dividend income above £150,000 will be taxed at 42.5%.

The tax free personal allowance (£6,475 for 2009/10) will be tapered down to nil for those individuals who have taxable income of £100,000 or more from 6 April 2010. So once you have taxable income of about £113,000 you will completely lose the benefit of the tax free personal allowance.

If you have a significant amount of funds retained within your own company you may consider withdrawing some of those funds in the current tax year while the highest rate of tax is only 40%, or 32.5% on dividends, and you have full use of your personal allowance.

Pension Contributions
Pension contributions currently attract tax relief at your highest rate of tax however much you earn. This tax relief is thus worth more to those who pay tax at 40%, than basic rate taxpayers. With the increase in the top rate of tax to 50% from 6 April 2010 the tax relief on pension contributions would become even more valuable.

The Government has foreseen this and plans to restrict the tax relief given on pension contributions for those who pay tax at 50%. From 6 April 2011 the tax relief will be tapered down from those earning over £150,000 so that those earning £180,000 or more will only get the basic rate tax relief on all their pension contributions. The delay until 2011 in changing the tax relief would offer a window for pension planning, but that window has been blocked immediately for those earning £150,000 or more. If such an individual increases their current pension contributions beyond their normal contribution level, and those total contributions exceed £20,000 per year, a penalty rate of tax will apply.

Savings
The Chancellor has made two adjustments to help savers and pensioners who have been hit hard by the reductions in interest rates:

- The ISA savings limits are to be increased to £10,200, and £5,100 for the cash-only element of the ISA. These new limits come into effect on 6 April 2010 for most savers, but savers who are aged 50 on more on 6 October 2009 will be able to take advantage of the new limits from that date.
- The amount of capital disregarded when making a claim for pension credit, and certain other benefits will be increased from £6,000 to £10,000 from November 2009.

Savers who lost money when their bank went into liquidation will generally be compensated under the Financial Services Compensation Scheme (FSCS). This scheme returns the capital that was lost and an amount in respect of lost interest. The savers will now be taxed on the compensation received in respect of the interest lost, as if that amount was interest payable by a bank.

Capital Gains
The annual capital gains exemption for 2009/10 has been set at £10,100 for individuals and £5,050 for most trusts. This exemption remains in place irrespective of the levels of gains made in the tax year. The rate of capital gains tax for 2009/10 is set at 18% for all taxpayers. These two measures mean that most individuals pay far less tax on capital gains than they do on earnings, savings, dividends or profits.