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Rates and Allowances for 2008/09

The tax free personal allowances that will apply from 6 April 2008 have been announced, together with the rates and thresholds for National Insurance.

The main personal allowance for those aged under 65 will be £5435. This is the tax free amount you can earn in a tax year.

The personal allowances for those aged over 65 have increased by almost 20%, but the income limit which restricts the benefit of these allowances to those with relatively low incomes has only increased by 4%. This means some retired people may believe they will receive far more income tax free from April 2008, but in reality if their pensions have increased by the rate of inflation they are unlikely to benefit.

The rates of National Insurance remain the same with slight increases in the bands the rates are applicable to. If run your own company you can pay yourself between £4,680 and £5,435 per year from 6 April 2008 and pay no NI, but still receive an NI credit towards your state pension.

The upper thresholds for NI class 1 (paid by employees) and class 4 (paid by the self-employed) have been increased to help bring them in line with the point where the 40% rate of income tax becomes payable. This alignment will not be complete until 2009. However, this increase in the NI upper threshold means more of your wages or profits carry NI at the main rate: 11% for employees or 8% for self-employed, so you are likely to pay more NI overall in 2008/09 than in 2007/08. NI at 1% is also due on all profits or wages received above the upper thresholds. So having income such as dividends that NI does not apply to will be even more beneficial.

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