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Pre-Budget Report 2009

The latest Pre-Budget Report & Payroll

Throughout this article, we take a look at the latest Pre-Budget Report, as delivered by Chancellor Alistair Darling on 9 December 2009, and its implications on payroll teams across the UK.

The biggest burden will fall on those with the broadest shoulders... over half of the additional revenue raised will be paid by the top 2 percent of earners. The Rt Hon Alistair Darling MP, Chancellor of the Exchequer

Firstly, there’ll be an additional rate of income tax at 50 per cent applying to individuals on incomes of £150,000 and over. This is likely to cause some controversy, as traditionally relief is given at the highest rate available.

The changes will also affect high paid public sector workers as they “will make a greater contribution to the increasing value of pensions, with those earning over £100,000 paying more... Senior civil service will take a lead with a cut in its pay bill... These are tough choices, but they are essential if we are to stick to our plan to halve the deficit...”.

Additions were also made to restrict pension contribution reliefs, “the highest earners benefit disproportionately...., a quarter of all the money spent on pensions tax relief goes to the top 1½%” To “help to make this fairer” the government is to “reduce pension tax relief for people with incomes over £150,000.. .... I have decided to include employer pension contributions in the definition of income... To provide certainty, I will introduce a floor. No-one with an income below £13,000 will be affected”.

How will this affect payroll from 6th April 2010?

Tax is actually a personal matter between individuals and HM Revenue & Customs and there may be some confusion that all these measures will be handled by Payroll – they’re not.

The individual is potentially going to be stung with a tax bill through Self Assessment – which could be considerable.

Tax Bands and 50% additional rate.

Payroll will use a new 50% tax band. The Free-pay notified by the tax code (if there is any) will be given as normal, and the relevant bands applied. For amounts that exceed free pay, the first £37,400 at Basic Rate 20%, then earning up to £150,000 at the Higher Rate 40%, then earnings over £150,000 at the “Additional rate” 50%.

The reduction in freepay for those earning over £100,000

This has nothing to do with payroll. Individuals tax free allowance are between the individual and HMRC. Employers operate whatever freepay tax code is issued (even if it is known that the individual is a high earner). The individual will receive a later tax demand directly as a result of Self Assessment.

The limitations on Pension Contributions £130,000/£150,000

Strictly speaking this is not a payroll matter. Pension Scheme and individuals may want to apply their own scheme rules or tools to inform employees of the implications, but the tax collection on Pension Reliefs restriction is not a PAYE activity where tax relief may be given – It’s something that will be picked up by Self Assessment and the individual will receive a later tax demand directly.

Second employments (non-exec directors or other types of secondary employments etc)

At the moment, HMRC have no tax code for deducting 50% tax on these 2nd employment earnings except by use of the standard banding. They are not introducing a “D1” 50% tax code until April 2011 (because their systems are not ready). The highest amount of tax that potentially can be deducted is by issue of tax code “D0” will only deduct 40% tax. These individuals must be prepared to receive an additional tax demand for the extra 25% tax to make the amount up to 50%.

What to say to your high earners?

Payroll will operate PAYE rules. If they are a high earner they may have additional tax to pay at 50% or make up other shortfalls. HMRC are likely to pick up these amounts by the Self Assessment filing deadline for the 2010/2011 tax year which is January 2012.

If you’re a high earner impacted by this,  please don’t blame payroll, it’s your  liability and may be higher than the payroll deduction. You may well owe the government more so prepare and save.

As Mr Darling said: “Fairness in tax is a crucial part of maintaining fiscal sustainability”.