Personal Tax Allowance - Increases from September to reduce the impact of removing the 10% tax rate
Written by Ian Congreave - Filed under: Tax rates and thresholds on July 7th, 2008
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(The following news item, which we published in May 2008, has been updated to incorporate further information that HMRC has released recently.)
On 13 May, the Chancellor announced to Parliament that, in order to reduce the impact of the removal of the 10% tax rate from April 2008,
- the personal allowance will be increased by £600, from £5,435 to £6,035 and backdated to the start of the tax year, giving a new emergency tax code of 603L
- the basic rate limit, the amount of earnings on which 20% tax is due, will be reduced from £36,000 to £34,800, and, as a result,
- the higher rate threshold, the point from which 40% tax is due on earnings (i.e. the sum of the personal allowance and the basic rate limit), will be reduced from £41,435 to £40,835.
About 40 million people will benefit from the change and some 600,000 low-paid employees will stop paying tax altogether.
There is no corresponding changes to the NICs earnings threshold, which has deliberately been set at the same level as the tax threshold since 2001. The starting point for the payment of both income tax and NICs is currently set at £5,435 for both taxes. The two rates will diverge from September 2008.
Implementation date
HMRC expects that the government will make these changes effective with effect from 7 September 2008, i.e. tax week 23. All suffix codes will increase by 60 points, e.g. from 543L to 603L. Employers should not change any other tax codes until instructed to do so by means of a revised P6 coding notice.
The overall effect is to reduce the taxable pay of 20% taxpayers by £600 during 2008/09, with a resulting fall of £120 in the amount of tax paid in the year. Monthly-paid employees with cumulative tax codes will receive £60 of this £120 in their September pay, followed by £10 a month for the rest of the tax year. Weekly-paid employees’ pay will increase by about £53 in week 23, and by about £2.30 per week thereafter. Employees with non-cumulative codes will receive an increase of £10 (monthly-paid) or £2.30 (weekly-paid), and will receive the full increase when either they are given a cumulative code during this tax year, or after the year end when their full liability for the year has been determined.
Overall impact on employees
The impact of the changes will be that employees with the new 603L emergency tax code applied on a cumulative basis,
- will stop paying tax altogether if they have annual earnings that do not exceed £6,035
- will pay £120 less tax over the tax year (i.e. £600 @ 20%) if their annual earnings exceed £6,035
- will start to pay tax at 40% if their annual earnings exceed £40,835
- will pay tax at the same level if their annual earnings are £41440 or more.
The Chancellor did not claim that the increase in the personal allowance would remove altogether the effect of scrapping the 10% tax rate and, indeed, employees earnings between £6,035 and £10,510 will still pay more tax than they would have done if the 10% rate had remained in place. At the same time, employees earning between £16,000 and £40,000, who were already benefiting from the April 2008 changes, are gaining a further £120 a year in their net pay.
The following chart compares the effect of the changes that were introduced from April 2008 (i.e. personal allowance of £5,435 and basic rate limit of £36,000) with the further changes that are to be implemented in September 2008 (i.e. personal allowance of £6,035 and basic rate limit of £34,800). The personal allowance used for 2007/08 is £5,225.
| Salary | Tax paid in 2007/08 tax year (tax code 522L) | Tax paid in 2008/09 tax year | |||
| Using April 2008 rates and tax code 543L | % change on 2007/08 | Using Sept 2008 rates and tax code 603L | % change on 2007/08 | ||
| £ 5,000 | £0.00 | £0.00 | - | £0.00 | - |
| £ 6,000 | £77.00 | £112.00 | +45.5 | £0.00 | - |
| £ 7,000 | £177.00 | £312.00 | +76.3 | £192.00 | +8.5 |
| £ 8,000 | £341.80 | £512.00 | +49.8 | £392.00 | +14.7 |
| £ 9,000 | £561.80 | £712.00 | +26.7 | £592.00 | +5.4 |
| £10,000 | £781.80 | £912.00 | +16.7 | £792.00 | +1.3 |
| £11,000 | £1001.80 | £1112.00 | +11.0 | £992.00 | -1.0 |
| £12,000 | £1221.80 | £1312.00 | +7.4 | £1192.00 | -2.4 |
| £15,000 | £1881.80 | £1912.00 | +1.6 | £1792.00 | -4.8 |
| £20,000 | £2981.80 | £2912.00 | -2.3 | £2792.00 | -6.4 |
| £25,000 | £4081.80 | £3912.00 | -4.2 | £3792.00 | -7.1 |
| £30,000 | £5181.80 | £4912.00 | -5.2 | £4792.00 | -7.5 |
| £35,000 | £6281.80 | £5912.00 | -5.9 | £5792.00 | -7.8 |
| £36,000 | £6501.80 | £6112.00 | -6.0 | £5992.00 | -7.8 |
| £37,000 | £6721.80 | £6312.00 | -6.1 | £6192.00 | -7.9 |
| £38,000 | £6941.80 | £6512.00 | -6.2 | £6392.00 | -7.9 |
| £39,000 | £7161.80 | £6712.00 | -6.3 | £6592.00 | -8.0 |
| £40,000 | £7412.40 | £6912.00 | -6.8 | £6792.00 | -8.4 |
| £41,000 | £7812.40 | £7112.00 | -9.0 | £7024.00 | -10.1 |
| £42,000 | £8212.40 | £7424.00 | -9.6 | £7424.00 | -9.6 |
| £50,000 | 11412.40 | £10624.00 | -6.9 | £10624.00 | -6.9 |
There are no changes to the age 65 and 75 personal allowances. These have already been increased substantially from April 2008.
Instructions for employers
HMRC will send guidance to employers and payroll agents starting 23 July. The changes must be applied from the first payday on or after 7 September 2008. A new Employer CD-ROM will be issued between 13 and 26 August and will include
- new P7X instructions
- new Taxable Pay Tables B to D
- new Calculator Tables
- a new Employer Helpbook E12.
The P6 coding notices (provided online, in paper form, or as a listing, as appropriate) for employees without L suffix codes will be dated 24 August. No further P6s will be issued after this date until 14 September. If P6s for some affected employees are not received in time, they must be applied at the next available pay run.
Outstanding issues
From a payroll perspective, there are many, and as yet unanswered, questions and issues raised by this announcement.
- As the lower thresholds for tax and NICs are going to be different in future, there must be a question mark over the Government’s intention, from April 2009, to align the higher rate tax threshold with the NICs upper earnings limit. If the policy remains intact, the reduction in the higher rate threshold from September 2008 will result in a lower aligned figure from April 2009, down from an anticipated £44,000 to £43,300.
- The changes introduce a major unplanned project into HMRC’s schedule and budget for the year, involving new technical specifications for developers, revised Helpbooks and Employer CD-ROM, communicating changes that will affect every employer’s payroll at an unprecedented time of the year, issuing new P2 coding notices to taxpayers and new P9 coding notices to employers for employees without L-suffix codes (as if it were the start of a new tax year), and considerable scope for errors!
- All of the payroll software developers will have what is effectively an additional year-end update to build, test and issue for the September deadline. The development will involve considerable structural changes to their systems as, in some cases, they have not been designed to handle three different sets of tax rules within the same tax year. Like HMRC, they will also incur costs for which they have not budgeted and will be putting demands on development staff who will already either have planned holidays during the summer period or be committed to in-year filing and new P45 developments.. Depending on the terms of the licenses with their clients, the developers may not be able to pass on these additional costs.
- Employers must expect a new update to their payroll system in advance of tax week 23, creating similar resource and financial issues. Many of the staff in payroll departments and IT departments will be taking holiday after the end of the year-end reporting period, creating potential risks in successfully installing and testing the necessary new payroll updates.
Further information:
13 May 2008 Chancellor’s Announcement
PAYE (Pay As You Earn): change to personal allowance
Notes for Payroll Software Developers – June 2008 http://www.hmrc.gov.uk/comp/notes-11-5.pdf
The UK Payroll News is sponsored by HRD & Payroll Solutions
Written by Ian Congreave - Payroll writer and lecturer
Filed under: Tax rates and thresholds on July 7th, 2008
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