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Tax band changes as Government attempts to put right the 10% tax band mess

Published on May 15, 2008 |

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Following the "10p tax band fiasco", Gordon Brown has announced that the personal tax allowance will go up by £600, meaning that workers earning up to £40,835 will gain an extra £120 this year.

However, the higher rate (40%) tax threshold will be reduced by £1200 to ensure that the "lower paid" will benefit from the u-turn, rather than the better off.

According to The Telegraph, the measure will drag a further 150,000 people into the higher rate bracket.

Mike Warburton, of Grant Thornton, told the paper:

"A higher rate taxpayer saves £240 with an increase of £600 in the personal allowance - that is, 40% of £600 - but the Chancellor recovers all of that by reducing the higher rate threshold so that an extra 20% tax is paid on an extra £1,200 of income.

"About 150,000 basic rate taxpayers who thought they were going to be £120 better off this year and have an extra £60 in their paypackets in September will have that whisked away from them."

However, Top 20 accountancy firm PKF has warned that the Chancellor's announcement of increased tax allowances and changes to the basic rate band will cause more paperwork for employers who are already struggling to deal with changes to the PAYE system.

While welcoming the compensation for lower paid employees, Employment Tax and Rewards Partner Philip Fisher points out: "With business and public sector payroll teams across the UK racing to meet the impending filing deadlines for year end returns, the last thing they needed was news of more changes in September."

The tax rates and allowances already announced for 2008/09 were due to be applied for all pay dates from 18 May 2008. This up-rating exercise will now have to be repeated in September. HMRC will have to reissue thousands of notices of coding and reprint the payroll tax tables that all employers use. Payroll software suppliers will also have to issue updates to their customers.

"Although it may seem small compared to the £2.7bn tax cost of these concessions, the cost of this duplicated effort to HMRC and employers is another reminder of why the Government should get these things right the first time round", Philip commented.