Income tax personal allowances for 2006-07 have been increased uniformly across the board as a result of applying an inflation factor of 2.7%.
Income tax allowances
As a result, the basic personal allowance has risen from £4,895 to £5,035, The Chancellor has not chosen to increase the allowance to those over 65 by more than the rate of inflation this year, so the new age related allowance rises to £7,280 next year, with £7,420 available as a tax free allowance for the over 75’s. The age related personal allowance income limit, after which income reduced the age related personal allowance has similarly increased in line with inflation to £20,100.
Other tax allowances
The Report includes no details relating to tax allowances for Capital Gains Tax or Inheritance Tax, although the Inheritance Tax limits for the next three years were included in the Finance Act 2005.
National Insurance Contributions
The threshold for Class 1 National Insurance Contributions (NIC’s) for 2006-07 will be the same as that for income tax at £97 per week. Limits for Class 1 NIC’s are set as weekly amounts rather than annual equivalents. Below this threshold neither employers nor employees will pay any NIC’s on earnings. The rates of Class 1 NIC’s are unchanged at 11% for employees on the main band of earnings and 12.8% for employers. The upper earnings limit, above which employee contributions drop to 1% increases by £15 per week, up to £645 per week. As a result of these changes, an employee earning more than £645 per week will pay an extra £1.17 per week, or £60.84 a year in NIC’s next year.
For the self employed, the Class 2 rate of NIC has not increased this year, and remains a flat rate of £2.10 per annum. The annual profits for the small earnings exception below which Class 2 contributions need not be paid has risen by the rate of inflation and will be £4,465 per annum. Class 4 NIC on profits remains at 8% on the main profits band which is profits between £5,035 and £33,450 per annum. These new limits reflect the changes to the Class 1 bands. NIC is paid at a rate of 1% on profits above £33,540 per annum.
Benefit entitlement
Employees earning at least the lower earnings limit obtain credit for a number of state benefits, including both a basic and earnings related state pension (S2P). This limit will rise by the rate of inflation to £84 per week next year.
Comment
No surprises here, with all rises reflecting the rate of inflation and NIC rates pegged for another year. The dreaded alignment of the upper earnings limit with the higher rate threshold for income tax has receded for yet another year.
By Rebecca Bennyworth
The full details of all personal tax allowances, NIC rates and tax credit amounts for 2006-07 are available at
http://www.hmrc.gov.uk/pbr2005/pn02.htm
For the Pre-Budget report at-a-glance see the: live report.
