Payroll Advice

Changes to Basic Rate and more

— 27 February 2008 —

Changes to the Basic Rate as of April 2008 will see the 10% Tax Band being scrapped. In addition, more changes are taking place, this time with regard to the rates of interest covering quarterly instalment payments and early payments of corporation tax.

As indicated in the March edition of Ceridian Connection, the Basic Rate is set to be reduced as of April 2008, and the 10% Tax Band will also be scrapped.

What does this imply?

Gordon Brown brought in the 10% “Starting Rate”, and then announced its retirement. Previous governments have also used a “Reduced Rate” band (1978-1980) with a lower tax rate then the operated Basic Rate.

What this means is that, whereas previously the first £2,230 of taxable pay (after taking off free pay) was assessed at 10%, now the single person's allowance has been increased from £5,225 to £5,435, after which the new Basic Rate of 20% will be applied.

40% tax band

No change has yet been announced to the 40% tax band starting point which currently is set at £34,600 (after deducting free-pay). Alistair Darling's first full budget speech to be given on Wednesday 12 March may change that, and employees may experience the annual tax bounce for payment made from the 18th of May and the dribble of change that results through to the end of the tax year. 

Other implications

Employees need to understand the implications on their Net Pay under these new arrangements and other corresponding impacts. Where employees were receiving 22% tax relief’s on certain elements, these will now reduce to only 20%. For 40% tax payers the impacts are minimal, but potentially still present and the amount of tax reclaim through Self Assessment for items assessed at Basic Rate potentially increases by 11.1%.

Employees who participate in Salary Sacrifice arrangements that offer tax advantage for items such as Child Care, will see their net costs increase.
So for every £100 of childcare provided, the net cost to the employee will increase by £2 if they are a basic rate tax payer. This equates to a 3% increase on Net costs from £67 to £69 per £100 of childcare.
Equally for every tax approved pension contribution, the net cost to the employee will increase by an equivalent amount for Basic rate tax payers (+2.56%).

Charities and Gift Aid

Charitable giving is also impacted by the change. In most respects employees will leave their contribution amounts under Payroll Charitable Giving as is, so the charity continues to receive 100% of the contribution amount. The basic rate tax payer, however, will see the net cost of their donation increase by 2.56% as the relief on their contribution drops.
But many make charitable donations through Gift Aid where the individual gives a net amount. The charity then claims back from HM Revenue & Customs a basic rate tax relief amount, which currently adds 28% extra to the contribution given. This changes, and the charity will be in a position of only being able to claim back 25% (a 10.71% drop in the amount that can be claimed back from HMRC). This could impact charitable concerns greatly if the individual does not increase the net contribution amount donated.
Efforts are being undertaken to attempt to have the government keep the reclaim amount for the charities at 28% of the contribution amount, at least for a transitional period of time.

Personal and Stakeholder Pension Schemes

The more tangible impact for some payroll managers and individuals is on Personal Pension schemes including Stakeholder schemes. Currently contributions are paid as a net amount and the pension provider reclaims 28% of the contribution amount from HMRC to add to the pension scheme. This is even the case for 40% tax payers. No tax relief is ever given through the payroll for Personal Pension schemes or Stakeholder pension schemes (even if SHCOMP). As with Gift Aid, the amount of reclaim from HMRC will drop by 10.71% for contributions received from 6 April 2008. Will employees ask to increase their contribution amounts to cover the fall in the Gross amount being added into the pension scheme? Equally, some payrolls applications of Personal Pensions and Stakeholder pensions actually reduce the contribution amount being made through payroll by the equivalent of Basic Rate. All such schemes need urgent review and potential revision to account for the fall to 20%.

So where a scheme reduced the deduction amount by 22% (or only took 78%), these need to be changed to reduce the deduction amount by 20% (or only take 80%) to reflect the change in basic rate.

Payroll Managers need to be prepared for calls and enquiries around these changes.

More news: Corporation Tax

New rates of interest covering quarterly instalment payments and early payments of corporation tax not due by instalments, in respect of accounting periods ending on or after 1 July 1999 have taken effect as of 18 February 2008.

As a result of the recent movement in market rates, the rate of interest charged on underpaid instalment payments of corporation tax has changed from 6.5 per cent to 6.25 per cent.

The rate of interest on overpaid instalment payments of corporation tax, and on corporation tax paid early (but not due by instalments) has changed from 5.25 per cent to 5 per cent.

Del.icio.us Digg Newsvine Reddit Technorati Google