The chancellor, Alastair Darling has announced a £600 increase in the previously budgetted 2008/09 personal allowance as a “compensation package” for lower earners affected by the abolition of the 10% band for earned and pension income. This measure also reduces the higher rate threshold to compensate and so higher rate tax paying earners do not also receive the £120 windfall, which applies for this tax year only.
The effect of the change for a basic rate taxpayer on £25,000 p.a. is as follows:
| Before: | After: | ||||||||
|
Income band
|
Tax rate
|
Tax due
|
Income band
|
Tax rate
|
Tax due
|
||||
|
5,435
|
0%
|
0
|
6,035
|
0%
|
0
|
||||
|
19,565
|
20%
|
3,913
|
18,965
|
20%
|
3,793
|
||||
| Total: |
£25,000
|
£3,913
|
£25,000
|
£3,793
|
Result:The basic rate taxpayer becomes £120 better off.
Gordon Brown had announced the removal of the 10% tax band for this year in his 2007 budget, but it seems that MPs, cross party were unable to appreciate the full effect of the tax change until recently. Darling in this mini-budget has now silenced Labour's vociferous tax rebels and attempted to firm up his party's position ahead of the Crewe and Nantwich by-election.
Some of Accountingweb.co.uk's members were very quick to that the chancellor had made an error in he told the House of Commons that, “as the £600 increased personal allowance applies not just to basic rate taxpayers but also to those paying tax at a higher rate, I am therefore reducing the threshold at which an individual starts to pay tax at the higher rate by £600.” Doing the maths, this would allow higher rate taxpayers to also share in the windfall.
| Before: | After: | ||||||||
|
Income band
|
Tax rate
|
Tax due
|
Income band
|
Tax rate
|
Tax due
|
||||
|
5,435
|
0%
|
0
|
6,035
|
0%
|
0
|
||||
|
36,000
|
20%
|
7,200
|
34,800
|
20%
|
6,960
|
||||
|
8,565
|
40%
|
3,426
|
9,165
|
40%
|
3,666
|
||||
| Total: |
£50,000
|
£10,626
|
£50,000
|
£10,626
|
The effect of the change is that the tax liability of anyone who currently pays tax at 40 per cent will be unaffected by the increase in the personal allowance. Those brought into the higher rate will gain by up to £120 this year. The change will apply for PAYE purposes in September 2008 when basic rate taxpayers will receive an extra £60 followed by £10 per month until the end of the tax year.
Further example of the increase in personal allowances: No effect on earned or pension income of £41,435 or higher
| Before: | After: | ||||||||
|
Income band
|
Tax rate
|
Tax due
|
Income band
|
Tax rate
|
Tax due
|
||||
|
5,435
|
0%
|
0
|
6,035
|
0%
|
0
|
||||
|
36,000
|
20%
|
7,200
|
34,800
|
20%
|
6,960
|
||||
|
600
|
40%
|
240
|
|||||||
| Total: |
£41,435
|
£7,200
|
£41,435
|
£7,200
|
Editorial comment: The 10% savings band
The chancellor did not make any mention as to the effect of the change on the 10% savings band. HMRC is expected to publish revised guidance on this sadly complex topic in due course. posted on its website last month are now of course out of date.