Budget: Take on the taxing questions

Here's how to work out the changes to income tax and National Insurance

THE CHANCELLOR, Gordon Brown, confirmed the introduction of a 10 pence starting rate of tax to take effect from 6 April. The new rate will apply on the first pounds 1,500 slice of taxable income above the personal allowance of pounds 4,335.

Mr Brown also pledged that the Government would reduce the next tax level from 23 per cent to 22 per cent in April of next year.

The 10 pence rate will replace the former 20 per cent rate, which is being scrapped. The 20 per cent rate covered the first pounds 4,300 of taxable income, after allowances. However, scrapping the 20 per cent rate means that the 23 per cent tax slice has been extended downwards.

The higher tax bracket of 40 per cent will now begin to apply to earnings above pounds 28,000, allowances after, or pounds 32,335 before the single person's allowance.

At the same time, the Chancellor announced that from April next year, employees who are not contracted out of the state top-up pensions scheme, Serps, will see their National Insurance contributions both harmonised with the tax regime and raised in two tranches.

The net effect, according to Arthur Andersen, chartered accountants, will be that, taking both NI contributions and tax into account, a single person earning pounds 5,000 a year will be pounds 14.29 better off from April. The net gain remains at roughly that level until pounds 25,000, rising to pounds 22.83 better off on salaries above pounds 35,000 and beyond.

A married person earning pounds 10,000 a year, and whose married couple's tax allowance is being abolished, will see a net monthly increase in salary of pounds 7.26, rising to pounds 15.50 on earnings above pounds 35,000.

The changes to National Insurance are aimed at harmonising the rate at which individuals are taxed at the bottom end. At present, employees face paying a NI bill of 2 per cent on the first pounds 64 of their weekly income as soon as it reaches that level. This was described in the Budget as: "A tax on work, the entry fee every employee has to pay simply to be part of the NI system."

Thereafter, NI contribution levels rise to 10 per cent on incomes between pounds 64 and pounds 485 a week. Mr Brown is proposing to alter the system from this April, by raising the weekly level on which NI is payable to pounds 66. Now, there will be no 2 per cent payable on earnings up to and including that amount.

The upper limit on which NI is payable will rise to pounds 500 a week. In April 2000, the earnings point above which employees pay NI contributions will be raised by pounds 21 per week over two years - from pounds 66 in April 1999 to pounds 76 in April 2000 and then to pounds 87 - the level of the single person's tax allowance - in April 2001.

At the same time, the upper earnings limit, the point above which employees stop paying NI contributions, will be raised by pounds 30 per week to pounds 535 from April 2000, and then by pounds 55 per week from April 2001, to pounds 575 per week.

For someone earning more than pounds 575 a week, the weekly NI burden will rise from pounds 43.28 at present to pounds 48 a week in April 2001, or about pounds 20 a month.

For the self-employed, flat-rate NI contributions of pounds 6.55 per week, paid once earnings exceed pounds 72.50, will be cut to pounds 2 a week. However, NI will be raised from 6 per cent on profits between pounds 145 and pounds 500 per week to 7 per cent.

At the same time, the lower earnings limit on which NI is payable will be cut to pounds 85 per week, and the upper limit will be raised to pounds 535, and then to pounds 575 by 2001. The total effect will be to raise the maximum rate of NI payable from pounds 21.30 to pounds 34.30 a week.

Nic Cicutti