1. This clause introduces the new starting rate of income tax from 6 April 1999. In 1999-00, this will cover the first £1,500 of taxable income, and will replace the lower rate band. However, the starting rate will not apply to income from savings (in section 1A of the Income and Corporation Taxes Act (ICTA) 1988). The rates of tax on savings income remain at the lower rate of 20 per cent for income up to the basic rate limit and 40 per cent above that, except for dividends which, from 6 April 1999, will be taxed at 10 per cent up to the basic rate limit and 32.5 per cent above that.

2. The 10 per cent starting rate is one of a range of measures designed to ensure that people on lower pay keep more of what they earn. It is intended to improve work incentives and help by makeing work pay.

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DETAILS OF THE CLAUSE

3. Sub-section (1) replaces the reference in section 1(2)(aa) of ICTA 1988 to the lower rate band with a reference to the new £1,500 starting rate band.

4. Subsection (2) replaces the definition of the lower rate limit at section 1(2A) of ICTA 1988 with a definition of the starting rate limit.

5. Sub-section (3) replaces the reference to the lower rate at section 1(3) of ICTA 1988, which defines the basic rate limit, with a reference to the starting rate.

6. Sub-section (4) amends the rules which provide for statutory indexation of the rate band limits. Specifically, it provides that the starting rate limit should be rounded up after indexation to the nearest multiple of £10, and that the basic rate limit should, as now, be rounded up to the nearest multiple of £100.

7. Sub-section (5) disapplies statutory indexation of the £1,500 starting lower rate limit for 1999-00, which would otherwise have increased that limit in line with the increase in the Retail Prices Index in the year to September 19988.

8. Sub-section (6) replaces the reference to the 'lower rate' in section 1(6A) of ICTA 1988 with a reference to the 'starting rate'. Section 1(6A) of ICTA 1988 will then provide that, where income tax due at the basic starting rate has been paid on income chargeable charged at the starting basic rate, an appropriate repayment should will be made on the making of a claim.

9. Sub-section (7) inserts new sub-sections (1B) and (6A) into section 1A of ICTA 1988. These new sub-sections are necessary as the replacement of the lower rate band with the starting rate band means some existing definitions needed for the taxation of savings income are being repealed. New sub-section (1B) defines the lower rate as being equal to 20 per cent, or such other rate as Parliament shall decide. The existing definition in section (1)(2)(aa) is being repealed. New sub-section (6A) provides that, where tax has been deducted from income at the basic rate, but the income is only taxable at the lower rate, then the difference can be repaid. The existing provision in section 1(6A) is being repealed.

10. Sub-section (8) replaces the references to the 'lower rate' with references to the 'starting rate' in the following sections of ICTA 1988:

section 547(5)(c) (life policies, etc.: method of charging gain to tax); and

section 550(3) (life policies, etc.: relief where gain charged at a higher rate).

These are consequential amendments, following from the introduction of the starting rate.

11. Sub-section (9) replaces references to the 'lower rate by virtue of section 1(2)(aa) [of ICTA 1988]' with references to the 'starting rate' in the following sections of ICTA 1988:

section 549(2) (life policies, etc.: deficiencies allowable as deductions);

section 699(2) (relief from higher rate for inheritance tax on accrued income); and

section 819(2) (old references to standard rate tax).

These are consequential amendments, following from the introduction of the starting rate.

12. Sub-section (10) replaces the existing definition of the 'lower rate' in section 832(1) of ICTA 1988. It provides instead for that 'lower rate' to shall mean the rate of income tax specified in or determined in pursuance of section 1A(1B) of ICTA 1988. (Section 1A(1B) is inserted by sub-section (7) of this clause, and together these amendments mean that the lower rate will, from 6 April 1999, only be applicable to income from savings as defined in section 1A of ICTA 1988).

This sub-section also inserts a definition of the starting rate into section 832(1) of ICTA 1988. It provides for that the 'starting rate' shall to mean the rate of income tax determined in pursuance of section 1(2)(aa) of ICTA 1988, and for that any references to the 'starting rate limit' shall to be construed in accordance with section 1(2A) of ICTA 1988. (Sections 1(2)(aa) and 1(2A) are amended by sub-sections (1) and (2) of this clause.)

13. Sub-section (11) replaces the references to 'or the lower rate' with references to ', the lower rate or the starting rate' in the following sections of the Taxes Management Act 1970:

section 7(6) (notice of liability to income tax and capital gains tax);

section 91(3)(c) (effect of interest in reliefs).

These are consequential amendments, following from the introduction of the starting rate.

14. Sub-section (12) provides that these changes shall apply for the year 1999-00 and subsequent years of assessment.

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15. The changes proposed in the 1999 Finance Bill will reform the structure of UK income tax rates and rate bands. Specifically, the Bill will introduce a new 10 per cent starting rate of income tax.

16. For the year 1998-99, income tax is charged at one or more of three rates, depending on the level of an individual's taxable income. Income tax is charged at the lower rate of 20 per cent on taxable income up to the lower rate limit of £4,300. It is charged at the basic rate of 23 per cent on taxable income between the lower rate limit and the basic rate limit of £27,100, and at the higher rate of 40 per cent above that limit.

17. From 6 April 1999, the lower rate of income tax will be replaced by the starting rate of 10 per cent for most sources of income. In 1999-00, the starting rate this will apply to taxable income up to the starting rate limit of £1,500. Income tax will be chargeable at the basic rate of 23 per cent on income between the starting rate limit and the basic rate limit (this limit will be £28,000 in 1999-00), and at the higher rate of 40 per cent above that limit.

18. The starting rate will not apply to income from savings (as defined in section 1A of ICTA 1988). The rates of tax on savings income remain at the lower rate of 20 per cent for income up to the basic rate limit and at 40 per cent above that, except for dividends which, from 6 April 1999, will be taxed at 10 per cent up to the basic rate limit and at 32.5 per cent above that limit.