Alistair Darling has performed an unprecedented u-turn as Chancellor by changing and back-dating income tax thresholds during the tax year.
Following the furore and political crisis that followed the elimination of the 10p tax band where millions of employees lost out, the latest action to reduce the impact is to increase the personal tax allowance by £600, for example the emergency tax code of 543L will change to 603L changing allowances from £5,435 to £6,035.
The amount of earnings on which the 20% tax is due will decrease from £36,000 to £34800 and as a result the higher rate threshold, the point from which 40% tax is due on earnings will be reduced from £41,435 to £40,835
The overall effect is to reduce the taxable pay of 20% tax payers by £600 during 2008/09, with a resulting fall of £120 in the amount of tax paid within 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' net 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 around £2.30 weekly paid, and will receive the full increase when either they are given a cumulative code during the tax year or after the year end when their full liability for the year has been determined.
So what effect will this have on us? Well, from an employee's point of view the major changes will be that anyone not exceeding the new £6,035 allowance will stop paying tax altogether but if their pay exceeds that amount and they are cumulative paid they will be paying £120 less tax over the year. There are unfortunately still downsides in the new Personal Tax Allowance. Employees who earn 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 earnings between £16,000 and £40,000 who already benefit from the April 2008 changes are gaining a further £120 in their net pay.
There are no changes to the age 65 and 75 personal allowances. These have already been increased substantially from April 2008.
Employers will receive a letter from the HMRC warning them of the change to the tax bands and personal allowances sometime in July/August but here at Qtac we will be going that step further and be distributing an update to all of our customers, which will simply update all L suffix codes and tax bands within our client's payroll so that our clients can continue their daily duties with little interruption. If you are using any Qtac Payroll Products payroll software full instructions will be given in plenty of time but importantly remember that you must implement changes after the last payday before 7th September.
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