Friday April 11, 04:00 PM
Is there still a 10% income tax rate?
By Steve Lodge
Wealth Questions (April 5/6) says that as well as the new £9,030 age-related personal allowance for 65-74 year-olds in the 2008/9 tax year, older people can still benefit from the lower 10 per cent rate for the next £2,320 of their income.
I thought the 10 per cent rate was being abolished, hence the political hoo-hah this week. Under what circumstances is it still claimable?Lenka Hennessey, tax director at accountants Grant Thornton, says that while the old 10 per cent starting rate of income tax was abolished for the new 2008/9 tax year, which got underway on April 6, it has in effect been retained for some savers. Whether this starting rate is actually available for individuals will depend on the amount and types of income they receive. But pensioners as well as qualifying under-65s may be able to benefit. An important consideration here is that income types are taxed in the following order: non-savings (pensions, earnings, rental income); savings (interest from banks, building societies or fixed interest securities); and dividends. Individuals with qualifying savings interest in the slice of their income above their personal allowance (£5,435 for under 65s; £9,030 for 65-74 year-olds) but within the next £2,320 of income will be taxed at only 10 per cent on that interest. However, should their taxable non-savings income (pensions, for example) exceed the starting rate limit for savings, the 10 per cent savings rate is not available. This means that those with earnings, pensions, or rental income over £7,755 (for under 65s) or £11,350 (for 65-74 year-olds) won't be able to benefit at all. Their savings will be taxed at 20 per cent up to the limit of the basic rate band of £36,000. A further wrinkle is that dividend income up to the basic-rate band amount of £36,000 in 2008/09 is also taxable at 10 per cent, a rule that is unchanged. Some examples may help illustrate what can seem a complicated allowance. For example, say Barbara is 67, receives a state pension of £4,800 and a pension from her former employer of £5,000, as well as interest on her savings of £400 after deduction of tax of £100 (£500 gross). Barbara's personal allowance of £9,030 is offset against her (non-savings) pension income. This leaves £770 of her pension income taxable at 20 per cent. Her taxable savings income is £500. As the total of her taxable non-savings and savings income (£770 plus £500) is less than the lower rate bracket of £2,320, her savings income is only taxable at 10 per cent. Barbara may, therefore, need to claim a refund for overpaid tax on her savings interest as the tax deducted at source was at 20 per cent. By contrast, Tom, 68, receives a state pension of £5,000 and income from a retirement annuity of £6,000. He also receives interest on his savings of £800 after deduction of tax of £200 (£1,000 gross). Tom's personal allowance of £9,030 is offset against his non-savings income (his pensions). This leaves £1,970 of his pension income taxable at 20 per cent. His taxable savings income is £1,000. As the total of his taxable savings income and non-savings income (£1,000 plus £1,970) is more than the £2,320, only £350 (£2,320 minus £1,970) of his savings income is taxable at 10 per cent with the remaining £650 taxable at 20 per cent. Tom can claim a refund for the part of his savings income that should have been taxed at 10 per cent rather than 20 per cent. However, 50-year-old Eric, by contrast, receives a salary of £25,000 and savings income of £200 after deduction of tax of £50 (£250 gross). As Eric's salary exceeds his personal allowance and the savings income limit (£5,435 plus £2,320), all of his taxable savings income of £250 will be taxable at 20 per cent. I have always had buildings insurance, regarding it as relatively affordable "catastrophe" cover, protecting my property against fire, flood and other major disaster. I currently pay less than £100 to cover my £1m property, which I regard as good value. But I am doubtful about the worth of contents insurance to me. I am a high earner with no children (to break anything) and wonder whether my contents would really be attractive to thieves: my most modern TV is 20 years old, I do not have iPods and other gadgets, do not keep cash, jewellery or other valuables lying around, and I would expect misuse of any stolen plastic cards to be covered by the card issuers. I also have the feeling that most break-ins are very "smash and grab" - ie, opportunistic - with relatively low overall losses. Also, my property is not on a flood plain or similar. Given that I could easily replace any stolen/broken/ruined contents from income, why should I pay £200+ a year for contents insurance? I reckon my buildings insurance is a bargain and my "self-insurance" on contents is better than the commercial alternatives. Peter Gerrard, head of insurance research at Moneysupermarket.com, the online comparison service, says nobody wants to have to pay more than necessary for something they hope they are never going to use. If your property structure is fully insured in the event of a catastrophe and you are happy to accept that if anything happened to your belongings you alone will replace them, then you have no need to take out contents insurance. But it is certainly worth running a quote with and without contents insurance - the difference in premiums is usually small. Although you have obviously given consideration to protecting your contents in the case of theft and protecting your property in the case of any natural catastrophe, you might also consider the cost of having to replace much of your contents if there was an accidental flood or fire in your home. Buildings insurance would only cover the cost of repairing the structure of the building and making it habitable again, not the cost of replacing your furnishings or belongings. I would suggest adding up the value of all your contents and seeing how much it would cost to replace them. If you are still comfortable with paying for replacements and repairs, should the worst happen, then there is no need for you to take out contents insurance. Any prospective insurance buyers should consider their individual needs, the level of cover required and the amount they are willing to cover themselves - either by removing policy extras (such as central heating or family legal cover with home insurance) or by increasing the voluntary excess they would pay in the event of a claim. These measures will reduce the annual premium. Wealth Questions (March 22/23) suggested that an individual could receive carer's allowance as well as the state pension. But I thought that carer's allowance was subsumed within the state pension, so that as soon as an individual starts receiving the state pension, any carer's allowance stops. Sally West, income policy manager at Age Concern England, says many pensioners wrongly believe they are not entitled to carers' benefits such as carer's allowance because they are in receipt of the state pension. It (Frankfurt: A0MLX5 - news) is true that most people receiving a basic state pension won't be entitled to carer's allowance because these are overlapping benefits. But those who receive a small state pension can sometimes get a top-up of carer's allowance, up to a total - including pension - of £50.55. And if the individual receives a larger state pension but is entitled to pension credit, council tax benefit or housing benefit, it is still often worth making a claim for carer's allowance as the carer could receive increased benefits instead. For pensioners on low incomes, the extra money that this brings in - called a carer's addition and up to a maximum of £27.75 on top of existing means-tested benefits - can make quite a difference. However, this would probably not apply in your case as you appear to have a higher income and are therefore unlikely to qualify for these benefits. For a free information sheet on carer's allowance and other benefits please contact Age Concern's free information line on 0800 00 99 66.
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