IR1 9 March 1999 REFORM OF INCOME TAX RATES AND ALLOWANCES The Chancellor today unveiled a three year package to reform the structure of income tax and meet the Government's commitments to improve work incentives and help both pensioners and families with children. A new 10 pence rate of tax will be introduced for the new tax year, which begins on 6 April. The 10p rate will be the lowest rate of income tax this country has seen for more than 35 years, and will ensure that people on lower pay keep more of what they earn. And from April 2000, the basic rate of income tax will also be cut by a penny, taking it to 22p, the lowest it has been for almost 70 years. Together, these changes will improve work incentives by making work pay. A new children's tax credit, designed to support families by supporting children, will be introduced from April 2001. The children's tax credit will be available to all families with one or more children, and will be worth up to #8 per week. The married couple's allowance (MCA) for people aged under 65 and its associated allowances will be abolished from April 2000. The new credit will be worth more than twice as much as the MCA. The Chancellor will meet his promise of a minimum tax guarantee for pensioners by increasing the age-related personal allowances by up to #200 more than statutory indexation. Everyone aged 65 or more will be able to have an income of at least #110 a week before they have to pay any income tax. People aged 75 and over will be able to have an income of #115 a week without paying income tax. DETAILS 1. The Government is committed to improving work incentives and promoting a fair and efficient tax system. Introducing a new 10p rate of tax and cutting the basic rate will help to ensure that work pays. The 10p rate will apply to taxable income up to #1,500 and replaces the lower rate of 20p. The rates of tax on savings income remain at 20p for income below the basic rate limit and 40p above that. The Chancellor has also increased the basic rate limit in line with indexation, so people will now pay tax at the higher rate only if they have income of at least #32,335. These changes are part of the Government's strategy to help people into work. 2. The Chancellor has said that a primary aim of the Government must be to support families by supporting children. In last year's Budget, he announced a substantial increase in Child Benefit, to be funded by restricting the rate at which relief for the MCA (and associated allowances) is given to 10 per cent. The replacement of these allowances by the children's tax credit is the next step in reforming the way in which the Government supports families and children. It will benefit around five million families, and will target resources more closely on families with children. 3. The children's tax credit can be claimed by families who have one or more children under 16 living with them. It will take the form of an allowance for which relief is given at 10 per cent. In 2001-02, the amount will be #4,160 at 10 per cent. 4. To target the benefit of the children's tax credit on the families that need it most, the credit will gradually be withdrawn where the person claiming it is liable to tax at the higher rate. 5. As part of the package to make work pay and improve support for families with children, the Chancellor has also announced increases in the Working Families Tax Credit. The basic credit in the WFTC will be increased by #2.50 and the credit for children under 11 years old will be increased by #4.70, from October 1999. From April 2000, there will be a further increase of #1.10 in the credit for children under 11. 6. The Chancellor announced in the Comprehensive Spending Review in July last year that he would introduce a minimum tax guarantee for pensioners. The increase in the age-related personal allowance meets that commitment. The personal allowance for someone aged 65 to 74 years old will rise by #310 to #5,720, and the allowance for someone aged 75 and over will rise by #380 to #5,980. These increases will save pensioners up to #1.68 a week in tax by comparison with the 1998-99 allowances. The Budget package will mean that 200,000 pensioners are taken out of income tax altogether. 7. For 1999-2000, the MCA for the under 65s will rise in line with statutory indexation to #1970. When the Chancellor announced in the Budget last year that relief for MCA would be restricted to 10 per cent from April this year, he also said that the enhanced MCA available to couples where at least one spouse is aged 65 or over would be increased to preserve its value. Today he announced that it would increase further, in line with indexation. This will take MCA to #5,125 for a couple where at least one spouse is aged 65 to 74, and to #5,195 for couples where one of the spouses is 75 or older. 8. Couples in which at least one of the spouses is aged 65 or more on or before 5 April 2000 will be able to keep the MCA when it is abolished for younger couples. After that date, people will not be able to make new claims for the MCA when they or their spouse reach the age of 65. However, when a person born on or before 5 April 1935 newly gets married, they or their spouse will still be eligible to claim MCA. 9. To target resources on pensioners with lower incomes, the age-related allowances are progressively withdrawn from people with income above a certain limit. This limit will also rise in line with indexation by #600, to #16,800. The limit applies to both the age-related personal allowance and the age-related MCA. But these allowances cannot be reduced below the level which is given to people under 65. 10. The Chancellor announced in his pre-Budget Report in November that the personal allowance for 1999/2000 would rise in line with statutory indexation to #4,335. The Blind Person's Allowance will also rise in line with indexation to #1,380. NOTES FOR EDITORS 1. For couples where neither of them is a higher rate taxpayer, it will be open to them to choose to allocate the whole credit to either of them or to share it equally between them. Any surplus credit that one spouse or partner cannot use can be passed to the other. 2. The children's tax credit will gradually be withdrawn where the person claiming it is liable to tax at the higher rate. These people will lose #1 of tax credit for every #15 of income above the point at which they start to pay higher rate tax until their entitlement to the credit is exhausted (at an income of about #38,500). Those who are affected by these withdrawal provisions will not be able to transfer the credit to their spouse or partner. This will prevent one spouse or partner's income affecting the income tax liability of the other. 3. Where more than one person is eligible to claim the children's tax credit in respect of the same child, they will be able to apportion the credit between them as they agree. If they cannot agree, the credit will be shared out on the basis of the length of time for which the child is resident with each of them during the tax year - this will be similar to the current rules for apportioning the Additional Personal Allowance (APA). In years in which a change of circumstance arises - for example, the year when a couple get married or stop living together - the credit will be apportioned for the periods when the different circumstances apply, and the appropriate rules about entitlement to the credit will apply in each part of the year. 4. Other reliefs and allowances, which are generally worth the same as the basic MCA, will also be abolished from April 2000. These include the APA, relief for maintenance payments, and the widow's bereavement allowance (WBA). The APA is mainly available to separated and unmarried parents. 5. Tax relief for maintenance payments will be retained where one or both of the parties to the marriage is aged 65 or over at 5 April 2000. But the special transitional relief for payments under arrangements originally set up before 15 March 1988 is being ended. Instead, the relief for payments under maintenance arrangements set up on or after 15 March 1988 will apply to all maintenance payments for those who remain entitled to relief. Recipients of payments made under arrangements set up before 15 March 1988 will no longer be taxable on the payments they receive. 6. The WBA is given to widows for up to two years. It is discriminatory because it is not available to widowers. Widows will be more than compensated for the loss of this allowance by the proposed Bereavement Payment in the Welfare Reform and Pensions Bill. This will be available to widows and widowers, and will help taxpayers and non-taxpayers alike. 7. The rates of income tax and the allowances for 1999/2000 are set out in the tables overleaf. The revenue effects of the income tax measures are set out in the Financial Statement and Budget Report. Tables showing the effects of the Budget package for people in different circumstances will also be available on the Inland Revenue website at www.inlandrevenue.gov.uk. INLAND REVENUE PRESS OFFICE Media enquiries to: 0171 438 6692/6706/7327 (Out of hours: 0860 359544) Non-media enquiries to: 0171 438 6420/6425 (Office hours only) Inland Revenue information is on the Internet: www.inlandrevenue.gov.uk # = pounds sterling (# a year) 1998-99 1999- Increase 2000 Income tax allowances Personal allowance 4 195 4 335 140 Married couple's allowance *, 1 900 1 970 70 additional personal allowance *, and widow's bereavement allowance * For people aged 65-74 personal allowance 5 410 5 720 310 married couple's allowance * 4 965 5 125 160 For people aged 75 and over personal allowance 5 600 5 980 380 married couple's allowance * 5 025 5 195 170 Income limit for age-related allowances 16 200 16 800 600 Blind person's allowance 1 330 1 380 50 1. Tax relief for these allowances is restricted to 15 per cent for 1998-99 and 10 per cent for 1999/2000. The amounts for age-related MCA in 1999-2000 were increased so that the value of this allowance for people aged 65 and over would be protected. For consistency, the figures shown for 1998-99 for these allowances reflect these increases. Only the further increase (in line with indexation) is reflected in the table. Bands of taxable income 1998-99 (# a year) 1999-2000 * (# a year) Lower rate 0 - 4 300 Starting rate 0 - 1 500 20 per cent 10 per cent Basic rate 4 301 - 27 100 Basic rate 1 501 - 28 000 23 per cent 23 per cent ** Higher rate over 27 100 Higher rate over 28 000 40 per cent 40 per cent * For 1999/2000, the rates of tax applicable to savings income in Section 1A ICTA 1988, other than dividends, remain at 20 per cent for income below the basic rate limit and at 40 per cent above that. The rates applicable to dividends will be 10 per cent for income below the basic rate limit and 32.5 per cent above that. ** The basic rate for 2000/2001 will be 22 per cent.