Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 2 — Basic provisions
Chapter 2 — Rates at which income tax is charged
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Income charged at particular rates
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Income charged at the starting, basic and higher rates: individuals
(1)
Income tax is charged at the starting rate on an individual’s income up to the
starting rate limit.
(2)
Income tax is charged at the basic rate on an individual’s income above the
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starting rate limit and up to the basic rate limit.
(3)
Income tax is charged at the higher rate on an individual’s income above the
basic rate limit.
(4)
This section is subject to—
section 12 (income charged at the savings rate),
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section 13 (income charged at the dividend ordinary and dividend upper
rates: individuals), and
any other provisions of the Income Tax Acts which provide for income of
an individual to be charged at different rates of income tax in some
circumstances.
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(5)
See section 20 for the starting rate limit and the basic rate limit.
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Income charged at the basic rate: other persons
(1)
Income tax is charged at the basic rate on the income of persons other than
individuals.
(2)
This section is subject to—
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section 12 (income charged at the savings rate),
section 14 (income charged at the dividend ordinary rate: other persons),
Chapters 3 to 6 of Part 9 (which provide for some income of trustees to be
charged at the dividend trust rate or at the trust rate), and
any other provisions of the Income Tax Acts which provide for income of
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persons other than individuals to be charged at different rates of
income tax in some circumstances.
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Income charged at the savings rate
(1)
Income tax is charged at the savings rate on a person’s income which—
(a)
is savings income, and
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(b)
would otherwise be charged at the basic rate.
(2)
This is subject to—
Chapters 3 to 6 of Part 9 (which provide for some income of trustees to be
charged at the dividend trust rate or at the trust rate),
section 504(3) (treatment of income of unauthorised unit trust), and
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any other provisions of the Income Tax Acts (apart from sections 10 and
11) which provide for income to be charged at different rates of income
tax in some circumstances.
(3)
Section 16 has effect for determining the extent to which a person’s savings
income would otherwise be charged at the basic rate.
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Income Tax Bill
Part 2 — Basic provisions
Chapter 2 — Rates at which income tax is charged
6

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Income charged at the dividend ordinary and dividend upper rates:
individuals
(1)
Income tax is charged at the dividend ordinary rate on an individual’s income
which—
(a)
is dividend income,
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(b)
would otherwise be charged at the starting or basic rate, and
(c)
is not relevant foreign income charged in accordance with section 832
of ITTOIA 2005 (relevant foreign income charged on the remittance
basis).
(2)
Income tax is charged at the dividend upper rate on an individual’s income
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which—
(a)
is dividend income, and
(b)
would otherwise be charged at the higher rate.
(3)
Subsections (1) and (2) are subject to any provisions of the Income Tax Acts
(apart from section 10) which provide for income to be charged at different
15
rates of income tax in some circumstances.
(4)
Section 16 has effect for determining the extent to which an individual’s
dividend income would otherwise be charged at the starting, basic or higher
rate.
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Income charged at the dividend ordinary rate: other persons
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(1)
Income tax is charged at the dividend ordinary rate on the income of persons
other than individuals which—
(a)
is dividend income,
(b)
would otherwise be charged at the basic rate, and
(c)
is not relevant foreign income charged in accordance with section 832
25
of ITTOIA 2005 (relevant foreign income charged on the remittance
basis).
(2)
This is subject to—
Chapters 3 to 6 of Part 9 (which provide for some income of trustees to be
charged at the dividend trust rate or at the trust rate),
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section 504(3) (treatment of income of unauthorised unit trust), and
any other provisions of the Income Tax Acts (apart from section 11) which
provide for income of persons other than individuals to be charged at
different rates of income tax in some circumstances.
15
Income charged at the trust rate and the dividend trust rate
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For the circumstances in which income tax is charged at the trust rate and the
dividend trust rate, see Chapters 3 to 6 of Part 9.
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Savings and dividend income to be treated as highest part of total income
(1)
This section has effect for determining the rate at which income tax would be
charged on a person’s savings or dividend income apart from sections 12 and
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13.
(2)
It also has effect for all other income tax purposes except for the purposes of—

Income Tax Bill
Part 2 — Basic provisions
Chapter 2 — Rates at which income tax is charged
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(a)
section 491 (special rates not to apply to first slice of trustees’ trust rate
income), and
(b)
sections 535 to 537 of ITTOIA 2005 (gains from contracts for life
insurance etc: top slicing relief).
(3)
If a person has savings income but no dividend income, the savings income is
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treated as the highest part of the person’s total income.
(4)
If a person has dividend income but no savings income, the dividend income
is treated as the highest part of the person’s total income.
(5)
If a person has both savings income and dividend income—
(a)
the savings income and dividend income are together treated as the
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highest part of the person’s total income, and
(b)
the dividend income is treated as the higher part of that part of the
person’s total income.
(6)
See section 1012 for the relationship between—
(a)
the rules in this section, and
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(b)
other rules requiring particular income to be treated as the highest part
of a person’s total income.
(7)
References in this section to dividend income do not include dividend income
which is relevant foreign income charged in accordance with section 832 of
ITTOIA 2005 (relevant foreign income charged on the remittance basis).
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Repayment: tax paid at basic rate instead of starting or savings rate
(1)
This section applies if income tax at the basic rate has been paid on income on
which income tax is chargeable at the starting or savings rate.
(2)
If a claim is made, any necessary repayment of tax must be made.
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Meaning of “savings income”
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(1)
This section applies for the purposes of the Income Tax Acts.
(2)
“Savings income” is income—
(a)
which is within subsection (3) or (4), and
(b)
which is not relevant foreign income charged in accordance with
section 832 of ITTOIA 2005 (relevant foreign income charged on the
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remittance basis).
(3)
Income is within this subsection if it is—
(a)
income chargeable under Chapter 2 of Part 4 of ITTOIA 2005 (interest),
(b)
income chargeable under Chapter 7 of Part 4 of ITTOIA 2005
(purchased life annuity payments), other than income from annuities
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specified in section 718(2) of that Act (annuities purchased from certain
life assurance premium payments or under wills etc),
(c)
income chargeable under Chapter 8 of Part 4 of ITTOIA 2005 (profits
from deeply discounted securities), or
(d)
income chargeable under Chapter 2 of Part 12 of this Act (accrued
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income profits).
(4)
Income is within this subsection if—

Income Tax Bill
Part 2 — Basic provisions
Chapter 2 — Rates at which income tax is charged
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(a)
it is chargeable under Chapter 9 of Part 4 of ITTOIA 2005 (gains from
contracts for life insurance etc), and
(b)
an individual is, or personal representatives are, liable for income tax
on it (under section 465 or 466 of that Act).
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Meaning of “dividend income”
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(1)
This section applies for the purposes of the Income Tax Acts.
(2)
“Dividend income” is income which is—
(a)
chargeable under Chapter 3 of Part 4 of ITTOIA 2005 (dividends etc
from UK resident companies),
(b)
chargeable under Chapter 4 of that Part (dividends from non-UK
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resident companies),
(c)
chargeable under Chapter 5 of that Part (stock dividends from UK
resident companies),
(d)
chargeable under Chapter 6 of that Part (release of loan to participator
in close company), or
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(e)
a relevant foreign distribution chargeable under Chapter 8 of Part 5 of
ITTOIA 2005 (income not otherwise charged).
(3)
In subsection (2) “relevant foreign distribution” means a distribution of a non-
UK resident company which—
(a)
is not chargeable under Chapter 4 of Part 4 of ITTOIA 2005, but
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(b)
would be chargeable under Chapter 3 of that Part if the company were
UK resident.
Starting rate limit and basic rate limit
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The starting rate limit and the basic rate limit
(1)
The starting rate limit is £2,150.
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(2)
The basic rate limit is £33,300.
(3)
The basic rate limit is increased in some circumstances: see—
(a)
section 414(2) (gift aid relief), and
(b)
section 192(4) of FA 2004 (relief for pension contributions).
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Indexation of the starting rate limit and the basic rate limit
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(1)
This section applies if the retail prices index for the September before the start
of a tax year is higher than it was for the previous September.
(2)
The starting rate limit for the tax year is the amount found as follows.
Step 1

Increase the starting rate limit for the previous tax year by the same percentage
35
as the percentage increase in the retail prices index.
Step 2

If the result of Step 1 is a multiple of £10, it is the starting rate limit for the tax
year.

Income Tax Bill
Part 2 — Basic provisions
Chapter 3 — Calculation of income tax liability
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If the result of Step 1 is not a multiple of £10, round it up to the nearest amount
which is a multiple of £10.

That amount is the starting rate limit for the tax year.
(3)
The basic rate limit for the tax year is the amount found as follows.
Step 1
5

Increase the basic rate limit for the previous tax year by the same percentage as
the percentage increase in the retail prices index.
Step 2

If the result of Step 1 is a multiple of £100, it is the basic rate limit for the tax
year.
10

If the result of Step 1 is not a multiple of £100, round it up to the nearest amount
which is a multiple of £100.

That amount is the basic rate limit for the tax year.
(4)
Subsections (2) and (3) do not require a change to be made in the amounts
deductible or repayable under PAYE regulations during the period beginning
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on 6 April and ending on 17 May in the tax year.
(5)
Before the start of the tax year the Treasury must make an order replacing the
amounts specified in section 20 with the amounts which, as a result of
subsections (2) and (3), are the starting rate limit and the basic rate limit for the
tax year.
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Chapter 3
Calculation of income tax liability
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Overview of Chapter
(1)
This Chapter deals with the calculation of a person’s income tax liability for a
tax year.
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(2)
But it does not deal with any income tax liability mentioned in section 32.
(3)
This Chapter needs to be read with Chapter 1 of Part 14 (limits on liability to
income tax of non-UK residents).
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The calculation of income tax liability
To find the liability of a person (“the taxpayer”) to income tax for a tax year,
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take the following steps.
Step 1
Identify the amounts of income on which the taxpayer is charged to income tax
for the tax year.
The sum of those amounts is “total income”.
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Each of those amounts is a “component” of total income.

Income Tax Bill
Part 2 — Basic provisions
Chapter 3 — Calculation of income tax liability
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Step 2
Deduct from the components the amount of any relief under a provision listed
in relation to the taxpayer in section 24 to which the taxpayer is entitled for the
tax year.
See section 25 for further provision about the deduction of those reliefs.
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The sum of the amounts of the components left after this step is “net income”.
Step 3
Deduct from the amounts of the components left after Step 2 any allowances to
which the taxpayer is entitled for the tax year under Chapter 2 of Part 3 of this
Act or section 257 or 265 of ICTA (individuals: personal allowance and blind
10
person’s allowance).
See section 25 for further provision about the deduction of those allowances.
Step 4
Calculate tax at each applicable rate on the amounts of the components left
after Step 3.
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See Chapter 2 of this Part for the rates at which income tax is charged and the
income charged at particular rates.
If the taxpayer is a trustee, see also Chapters 3 to 6 and 10 of Part 9 (special rules
about settlements and trustees) for further provision about the income charged
at particular rates.
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Step 5
Add together the amounts of tax calculated at Step 4.
Step 6
Deduct from the amount of tax calculated at Step 5 any tax reductions to which
the taxpayer is entitled for the tax year under a provision listed in relation to
25
the taxpayer in section 26.
See sections 27 to 29 for further provision about the deduction of those tax
reductions.
Step 7
Add to the amount of tax left after Step 6 any amounts of tax for which the
30
taxpayer is liable for the tax year under any provision listed in relation to the
taxpayer in section 30.
The result is the taxpayer’s liability to income tax for the tax year.
24
Reliefs deductible at Step 2
(1)
If the taxpayer is an individual, the provisions referred to at Step 2 of the
35
calculation in section 23 are—
(a)
the following—
section 72 (early trade losses relief),
Chapter 6 of Part 4 (share loss relief),
Chapter 3 of Part 8 (gifts of shares, securities and real property to
40
charities etc),
sections 457 and 458 of this Act or section 266(7) of ICTA
(payments to trade unions or police organisations),
section 193(4) of FA 2004 (pension schemes: relief under net pay
arrangement: excess relief), and
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Income Tax Bill
Part 2 — Basic provisions
Chapter 3 — Calculation of income tax liability
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section 194(1) of FA 2004 (pension schemes: relief on making of
claim), and
(b)
the following—
section 64 (trade loss relief against general income),
section 83 (carry-forward trade loss relief),
5
section 89 (terminal trade loss relief),
section 96 (post-cessation trade relief),
section 118 (carry-forward property loss relief),
section 120 (property loss relief against general income),
section 125 (post-cessation property relief),
10
section 128 (employment loss relief against general income),
section 152 (loss relief against miscellaneous income),
Chapter 1 of Part 8 (interest payments),
Chapter 4 of Part 8 (annual payments and patent royalties),
section 574 (manufactured dividends on UK shares: payments by
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non-companies),
section 579 (manufactured interest on UK securities: payments not
otherwise deductible),
Part 2 of CAA 2001 (plant and machinery allowances), in a case
where the allowance is to be given effect under section 258 of
20
that Act (special leasing of plant and machinery),
Part 3 of CAA 2001 (industrial buildings allowances), in a case
where the allowance is to be given effect under section 355 of
that Act (buildings for miners etc: carry-back of balancing
allowances),
25
Part 8 of CAA 2001 (patent allowances), in a case where the
allowance is to be given effect under section 479 of that Act
(persons having qualifying non-trade expenditure),
section 555 of ITEPA 2003 (deduction for liabilities related to
former employment),
30
section 446 of ITTOIA 2005 (strips of government securities: relief
for losses),
section 454(4) of ITTOIA 2005 (listed securities held since 26 March
2003: relief for losses: persons other than trustees), and
section 600 of ITTOIA 2005 (relief for patent expenses).
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(2)
In any other case, the provisions referred to at Step 2 of the calculation in
section 23 are—
(a)
the provisions listed in subsection (1)(b), and
(b)
section 505 (relief for trustees of unauthorised unit trust).
25
Reliefs and allowances deductible at Steps 2 and 3: supplementary
40
(1)
This section supplements the provisions about reliefs and allowances in Steps
2 and 3 of the calculation in section 23.
(2)
At Steps 2 and 3, deduct the reliefs and allowances in the way which will result
in the greatest reduction in the taxpayer’s liability to income tax.
(3)
Subsection (2) is subject to—
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section 65(2) to (4) (priority rule in relation to trade loss relief against
general income),