The Chancellor announced that the basic Personal Allowance for the 2008-09 tax year will increase by £600 from £5,435 to £6,035. At the same time the basic rate tax band (the amount of taxable income you can earn before paying higher rate tax) will reduce from £36,000 to £34,800.
This guidance tells you when, whether and how the changes will affect you.
• When and how the changes will take effect
• How the changes will affect your pay and tax
• How the changes will affect your tax code
• If you’re a student and get tax-free pay
• If you’re a higher rate taxpayer
• If you’re 65 or over – further guidance
• Effect on other tax allowances and National Insurance
• Effect on attachment/arrestment earnings orders
When and how the changes will take effect
If you’re under 65, or are 65 or over but only qualify for the basic Personal Allowance
If you’re an employee or receive a personal or company pension the changes will be reflected in wages and pension payments from September 2008. The allowances will be backdated to the start of the tax year (6 April).
If you pay tax through Self Assessment, the new allowances will be taken into account in your Self Assessment tax calculation and tax bill for 2008-09.
If you’re 65 or over and qualify for the higher age-related Personal Allowance
If you qualify for the higher age-related allowances your tax allowances won’t change. Your higher age-related allowances were raised at the start of the tax year and you are already getting the benefit of these. For more information read the later section.
How the changes will affect your pay and tax
If you pay tax at the basic rate of 20 per cent
The changes take effect from the first pay day on or after 7 September and equate to a tax saving of approximately £120 over the course of the tax year. If your September pay day is on or after 7 September, you will pay up to £60 less tax that month. If you’re paid monthly and your September pay day is before 7 September, you will pay up to £70 less tax in October. How much your tax reduces will depend on how much you’ve paid already – and in some cases you might get a repayment as part of your pay.
After this if you’re paid monthly you will pay up to £10 a month less tax and if you’re paid weekly you will pay up to £2.30 less tax. (The actual figures will depend on your income.)
If you pay tax at the higher rate of 40 per cent
The changes will only benefit basic rate taxpayers. To find out more read the later section.
How the changes will affect your tax code
Your employer or pension provider will adjust your tax code based on the information that we send them.
• All tax codes that end in L will increase by 60.
• Codes P, V, Y, BR, D0 or NT will stay the same.
• Other codes may change, but this will depend on your particular circumstances and we will also write to you about this.
To find out more read the relevant section below.
If your tax code ends with a letter ‘L’
If your tax code ends with an L then broadly speaking the number in the tax code multiplied by 10 is the amount of tax-free pay you are entitled to for the year.
We will tell your employer that they can automatically increase your tax code by 60 - giving you the extra £600 of allowances announced by the Chancellor. For example the tax code 543L (showing the current Personal Allowance of £5,435) would change to 603L, taking your new Personal Allowance to £6,035. We won’t write to you separately about your new tax code unless something else changes which doesn’t relate to the Personal Allowance adjustment.
If you have asked us to set some of your allowance against another job or pension, we will add the extra personal allowance to the tax code for what our records show is the main one.
If your tax code starts with a letter ‘K’
You will have a K code if your overall untaxed income is greater than your tax allowances (the tax-free Personal Allowance and any other allowances to which you’re entitled). Broadly speaking, the K code number multiplied by 10 indicates how much must be added to your taxable income to make sure you pay the right tax overall.
If you currently get the basic Personal Allowance (as opposed to the higher age-related Personal Allowance) your K code number will reduce as a result of the changes (which means you’ll pay less tax) – and it’s even possible that you will no longer need a K code. Either way, we will write to you and your employer with a new code and your pay will be adjusted from September/October as described earlier.
If your tax code ends with a letter ‘T’
If your code ends with a T, it usually means that it’s been adjusted to take account of changes that will need to be reviewed again before or at end of the year.
Where possible we will use the change to the basic Personal Allowance to make adjustments to help get you off the T code as early as possible. We will send you and your employer details of any change needed, and your pay will be adjusted from September/October as described earlier.
If your tax code ends with letters P, V or Y
These codes relate to age-related tax allowances and will in this instance stay the same because you are already receiving the benefit of the increased age-related Personal Allowance which came into effect in April.
If you have BR, D0 or NT tax code
These tax codes are used where you have more than one job and/or pension. Therefore BR, D0 or NT tax codes won’t change.
If your code is operated on the ‘special basis’
Your PAYE Coding Notice (usually sent to you at the start of the tax year, but also at other times - to tell you which tax code you’re on) may state that your tax code is operated on the ‘special basis’. This means we tell your employer or pension provider to ignore previous earnings and tax paid this tax year when working out your tax. You will be on a special basis code either because we are waiting for missing information about your previous tax and pay or because there has been a change which could lead to an underpayment of tax by the end of the tax year.
In this case you’ll get the benefit of the £10 a month or £2.30 a week reduction from September 2008 but we won’t know if you’ll get the reduction backdated to April until we have the information we need about your previous tax and pay or until we have reviewed your total tax liability after 5 April 2009.
We will review all of these tax codes at the time we apply the new Personal Allowance rate and, where possible move you back onto a normal tax code (which means that you will get your Personal Allowance backdated then if applicable). If you need to stay on the special basis code following the review you will still get the benefit of the £10 tax reduction from September 2008 to April 2009. We’ll then check your actual tax position for the whole year.
If your tax code needs to be changed before 7 September for another reason
We will continue changing individual tax codes where necessary before 7 September (based on individual changes of circumstance) and using the current Personal Allowance of £5,435. If your tax code changes during this time it will then change again in September when the revised Personal Allowance of £6,035 starts to apply.
If you’re student and get tax-free pay
If you’re a student working solely in the holidays and you’ve already signed a form P38(S) for 2008-09 to get paid tax-free and your total earnings for the year go above £5,435 but will stay below £6,035 you must contact your employer and complete another P38(S) or equivalent record.
If your earnings go above £6,035 you’ll need to pay tax through your employer’s PAYE (Pay As You Earn) system. In this case you’ll get the benefit of the new Personal Allowance through your tax code.
If you’re a higher rate taxpayer
The changes announced by the Chancellor are designed to benefit basic rate taxpayers only. Higher rate taxpayers won’t be affected at all. This is because while the basic Personal Allowance has been increased by £600, the threshold at which you start to pay higher rate tax has been reduced by £600 - achieved through a £1,200 reduction to the basic rate tax band.
You currently pay higher rate tax on income above £41,435. This is called the ‘higher rate threshold’ and is the combination of the current basic Personal Allowance (£5,435) and the current basic rate band (£36,000).
After the changes the basic Personal Allowance will increase by £600 to £6,035 but the basic rate tax band will reduce to £34,800. When added together these last two make the new higher rate threshold £40,835 – which is £600 lower than it was previously.
Worked example for higher rate tax payer following the changes to the basic Personal Allowance and basic rate tax band
Gross Taxable Pay £55,000
Less Personal Allowance £5,435
20% on £36,000 = £7,200
40% on £13,565 = £5,426
Total tax due = £12,626
Rates from 7 September
Gross Taxable Pay £55,000
Less Personal Allowance £6,035
20% on £34,800 = £6,960
40% on £14,165 = £5,666
Total tax due = £12,626
If you’re aged 65 and over – further guidance
There are no changes to the full (age-related) Personal Allowance of £9,030 for an individual aged 65 to 74 and £9,180 for individuals aged 75 and over. So an individual with a tax code ending in V, Y or P will not get a new code number.
(The full age-related Personal Allowance amount is only available if your income is below £21,800. If your income is more than this, your allowances are gradually reduced down to the level of the basic Personal Allowance. In this case you will have a tax code ending in L or T. See above for what may happen if you have one of these tax codes. As described earlier, if your level of income means you only get the basic Personal Allowance then you will get the new rate of £6,035.)
Effect on other tax allowances and National Insurance
Blind Person’s Allowance, Married Couple’s Allowance and Income limit for age-related allowances
These allowances are unaffected by the changes.
National Insurance contributions
National Insurance rates and thresholds remain the same.
Effect on attachment/arrestment earnings orders
Most people will pay less tax because of the changes. As a result you will have more earnings for your attachment/arrestment. This in turn may mean that you’ll have more deducted for the attachment/arrestment. The effect will depend on your individual circumstances and the type of attachment/arrestment.
However, if you already pay the full amount due for child support or maintenance each payday the change won’t affect your attachment/arrestment deductions.
HMRC Home Page http://www.hmrc.gov.uk/