Annex B

Individualisation of Standard Rate Band

Present System

1. Under the present income tax system the standard rate tax bands are as follows:

Single

£14,000

Married One Income

£28,000

Married Two Income

£28,000

Under the present system the taxpayer in the married one income couple can utilise the full £28,000 standard band. In the case of a married two income couple the £28,000 can be divided among the spouses in any manner they wish.

Proposed Final System

2. The objective is to move over a three-year period to a position where each individual, whether single or married has his/her own standard rate tax band which can be set against his/her own income but which cannot be transferred between spouses. This will mean, using the current level of the band for married couples of £28,000 for illustrative purposes, that each individual will have a standard rate tax band of £28,000. Married couples will each have this £28,000 band but will be able to avail of it only to the level of each spouse's income, with neither spouse being able to use more than £28,000. The total cost of such a transition - if done in one move in the tax year 2000/01 - would be £839m. The cost of the present stage as announced in the Budget is £310m.

Proposed New System for 2000/2001

3. Under the new standard band arrangements in the Budget for 2000/2001, the single standard band is increased to £17,000. Two income married couples will have a combined standard rate tax band of up to £34,000 per annum, which is equal to two single bands of £17,000 each. The married one income couple will continue to have a standard rate band of £28,000 which will be available to the taxpaying spouse. The standard rate bands for the 2000/2001 tax year will now be:

Single

£17,000

Married One Income

£28,000

Married Two Incomes

£34,000

Examples of Proposed New System for 2000/2001

4. The £34,000 band for the two income couple will be transferable from one earning spouse to the other, subject to a maximum individual band of £28,000 for either spouse. The £28,000 limit arises from the fact that this is the maximum band that applies in the case of married one income couples and represents the target level ultimately for the individualisation of the tax band. Allowing transferability up to £28,000 ensures that nobody will have a lower effective tax band than under the present system.

5. Subject to this limitation, two income couples will be able to split their bands as they choose e.g. £17,000 each, £25,000 to one and £9,000 to the other, £28,000 to one and £6,000 to the other. The maximum band which one spouse can have will be £28,000. Therefore, it will not be permissible to split the bands £29,000/£5,000; £30,000/£4,000 etc.

6. The manner in which bands are split will depend on the relative incomes of both spouses so as to maximise the benefit of the bands. The following examples show how the bands might be used in particular cases in the current and new situation.

7. Example one shows the effects of the changes on a single taxpayer. In example two, the two taxpayers A & B are on incomes of £25,000 and £15,000. Under the existing tax system the current standard band of £28,000 is split £25,000 to A and £3,000 to B. In the new situation, the £34,000 band can be used £25,000 by A and £9,000 to B, giving the extra £6,000 standard rate band to B.

8. In example three the two taxpayers A & B are on incomes of £45,000 and £20,000. Under the existing tax system all of the current standard band of £28,000 is used by A. In the new situation, the £34,000 band can be used £28,000 by A and £6,000 by B, giving the extra £6,000 standard rate band to B.

9. In example four, the two taxpayers A and B are on incomes of £60,000 and £3,000. Under the existing tax system all of the current standard band, £28,000 is used by A. In the new situation, the couple can use up to £31,000 of the new standard band of £34,000, that is, the maximum of £28,000 for A and £3,000 for B which is B's actual income. It is not possible to use the full £34,000 band between both spouses in this case.

10. Example five shows the position when the new system is fully operational at the end of the proposed three year transition period, taking £28,000 as the individual standard band for illustrative purposes and the 2000/2001 allowances and tax rates. In this example, two taxpayers A and B are on incomes of £45,000 and £20,000, as in example three. In this final situation, A can avail fully of the band of £28,000 but B can use only £20,000. Together they can use £48,000 of the maximum £56,000 in bands.

Example One

Single Person

 

Existing System

 

Proposed System

Income per annum:

£25,000

 

£25,000

Standard Band Available

£14,000

 

£17,000

Tax Payable:

     

£14,000 @ 24%

£3,360

£17,000 @ 22%

£3,740

£11,000 @ 46%

£5,060

£ 8,000 @ 44%

£3,520

 

______

 

______

 

£8,420

 

£7,260

Less Personal Allowance:

     

£4,200 @ 24%

£1,008

£4,700 @ 22%

£1,034

Less PAYE Allowance

     

£1,000 @ 24%

£240

£1,000 @ 22%

£220

 

______

 

______

Total Tax Payable

£7,172

 

£6,006

Tax Saved £1,166

 

Example Two

Married Couple Two Incomes1

Existing System

     
 

Taxpayer A

 

Taxpayer B

Income

£25,000

 

£15,000

Standard Band Available

£25,000

 

£3,000

Tax Payable

     

£25,000 @ 24%

£6,000

£3,000 @ 24%

£720

   

£12,000 @ 46%

£5,520

 

______

 

________

 

£6,000

 

£6,240

Less Personal Allowances

     

(£4,200 @ 24%)

-£1,008

 

-£1,008

Less PAYE Allowance

     

(£1,000 @ 24%)

-£240

 

-£240

 

_________

 

_________

Total Tax Payable

£4,752

 

£4,992

Total Tax Paid By Couple

   

£9,744

Total Band Used £28,000

     

Proposed System 2000/2001

 

Taxpayer A

 

Taxpayer B

Income

£25,000

 

£15,000

Standard Band Available

£25,000

 

£9,000

Tax Payable

     

£25,000 @ 22%

£5,500

£9,000 @ 22%

£1,980

   

£6,000 @ 44%

£2,640

 

______

 

________

 

£5,500

 

£4,620

Less Personal Allowances

     

(£4,700 @ 22%)

-£1,034

 

-£1,034

Less PAYE Allowance

     

(£1,000 @ 22%)

-£220

 

-£220

 

_________

 

_________

Total Tax Payable

£4,246

 

£3,366

Total Tax Paid By Couple

   

£7,612

Total Band Used £34,000

 

Tax Saved

£2,132

1Note: In this case the personal allowances are split equally between both spouses on top of the individual PAYE allowances

Example Three

Married Couple Two Incomes2

Existing System

     
 

Taxpayer A

 

Taxpayer B

Income

£45,000

 

£20,000

Standard Band Available

£28,000

   

Tax Payable

     

£28,000 @ 24%

£6,720

   

£17,000 @ 46%

£7,820

£20,000 @ 46%

£9,200

 

______

 

________

 

£14,540

 

£9,200

Less Personal Allowances

     

(£4,200 @ 24%)

-£1,008

 

-£1,008

Less PAYE Allowance

     

(£1,000 @ 24%)

-£240

 

-£240

 

_________

 

_________

Total Tax Payable

£13,292

 

£7,952

Total Tax Paid By Couple

   

£21,244

Total Band Used £28,000

     

Proposed System 2000/2001

 

Taxpayer A

 

Taxpayer B

Income

£45,000

 

£20,000

Standard Band Available

£28,000

 

£6,000

Tax Payable

     

£28,000 @ 22%

£6,160

£6,000 @ 22%

£1,320

£17,000 @ 44%

£7,480

£14,000 @ 44%

£6,160

 

______

 

________

 

£13,640

 

£7,480

Less Personal Allowances

     

(£4,700 @ 22%)

-£1,034

 

-£1,034

Less PAYE Allowance

     

(£1,000 @ 22%)

-£220

 

-£220

 

_________

 

_________

Total Tax Payable

£12,386

 

£6,226

Total Tax Paid By Couple

   

£18,612

Total Band Used £34,000

 

Tax Saved

£2,632

2 In this case the personal allowances are split equally between both spouses on top of the individual PAYE allowances

Example 4

Married Couple Two Incomes3

Existing System

     
 

Taxpayer A

 

Taxpayer B

Income

£60,000

 

£3,000

Standard Band Available

£28,000

   

Tax Payable

     

£28,000 @ 24%

£6,720

   

£32,000 @ 46%

£14,720

£3,000 @ 46%

£1,380

 

______

 

________

 

£21,440

 

£1,380

Less Personal Allowances

     

(£8,400 @ 24%)

-£2,016

   

Less PAYE Allowance

     

(£1,000 @ 24%)

-£240

 

-£240

 

_________

 

_________

Total Tax Payable

£19,184

 

£1,140

Total Tax Paid By Couple

   

£20,234

Total Band Used £28,000

     

Proposed System 2000/2001

 

Taxpayer A

 

Taxpayer B

Income

£60,000

 

£3,000

Standard Band Available

£28,000

 

£3,000

Tax Payable

     

£28,000 @ 22%

£6,160

£3,000 @ 22%

£660

£32,000 @ 44%

£14,080

   
 

______

 

________

 

£20,240

 

£660

Less Personal Allowances

     

(£9,400 @ 22%)

-£2,068

   

Less PAYE Allowance

     

(£1,000 @ 22%)

-£220

 

-£220

 

_________

 

_________

Total Tax Payable

£17,952

 

£440

Total Tax Paid By Couple

   

£18,392

Total Band Used £31,000

 

Tax Saved

£1,932

3 In this case taxpayer A takes all the married personal allowances and taxpayer B takes their own PAYE allowance only

At End of Three Year Transition Period

Example 5

Existing System

     
 

Taxpayer A

 

Taxpayer B

Income

£45,000

 

£20,000

Standard Band Available

£28,000

   

Tax Payable

     

£28,000 @ 24%

£6,720

   

£17,000 @ 46%

£7,820

£20,000 @ 46%

£9,200

 

______

 

________

 

£14,540

 

£9,200

Less Personal Allowances

     

(£4,200 @ 24%)

-£1,008

 

-£1,008

Less PAYE Allowance

     

(£1,000 @ 24%)

-£240

 

-£240

 

_________

 

_________

Total Tax Payable

£13,292

 

£7,952

Total Tax Paid By Couple

   

£21,244

Total Band Used £28,000

     

Proposed System at end of three year transition peroid

 

Taxpayer A

 

Taxpayer B

Income

£45,000

 

£20,000

Standard Band Available

£28,000

 

£20,000

Tax Payable

     

£28,000 @ 22%

£6,160

£20,000 @ 22%

£4,400

£17,000 @ 44%

£7,480

   
 

______

 

________

 

£13,640

 

£4,400

Less Personal Allowances

     

(£4,700 @ 22%)

-£1,034

 

-£1,034

Less PAYE Allowance

     

(£1,000 @ 22%)

-£220

 

-£220

 

_________

 

_________

Total Tax Payable

£12,386

 

£3,146

Total Tax Paid By Couple

   

£15,532

Total Band Used £48,000

 

Tax Saved

£5,712

4 In this case the personal allowances are split equally between both spouses on top of the individual PAYE allowances