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Solving the abolition of the 10p rate

Article Summary: The coup by Gordon Brown in his last budget speech in March 2007 has officially backfired on the government as the UK general public get to feel the impact of the abolition of the 10% tax band and equally have to deal with rising inflation and heavy fuel costs.

The coup by Gordon Brown in his last budget speech in March 2007 has officially backfired on the government as the UK general public get to feel the impact of the abolition of the 10% tax band and equally have to deal with rising inflation and heavy fuel costs.

With claims of humiliation by the shadow chancellor, Mr Darling came to parliament on Tuesday 13th May 2008 with his “mini-budget” - an Emergency Budget announcement.

The impact of the original change
As a result of the 10% tax band removal, 5.3 million households have found themselves worse off. This in turn hit the pockets of many core Labour Party supporters which has caused public outcry and a backbench rebellion by Labour MPs. The government were originally resolute in the correctness of the change but suffered greatly in the local elections as a result.

So what was in the emergency budget?
With fears of the actual 2008 budget potentially looking at defeat in the commons, Alistair Darling’s emergency budget statement, the first such emergency statement in 15 years, was made as the “fairest and most effective way” to help those who had lost out through the scrapping of the 10p tax rate.

In the process of compensating the UK taxpayer, the government is borrowing £2.7 billion and raising personal tax allowances by £600 to make £6,035 (from £5,435). Anyone earning up to £40,835 gains a further tax relief equivalent to £120 this tax year. 4.2 million of the impacted individuals will be fully compensated and the remaining 1.1 million seeing their loss halved. The remaining losers are the very lowest earners who neither have families and do not work enough hours to qualify for tax credits.

At the same time, Mr Darling announced a reduction in the 40% tax band to £35,400. This will offset the compensation rebate for high earners, but equally will cause another 150,000 employees to fall into the 40% tax band.

So the 40% band sees its third change this tax year:

Payment due from 6th April =£34.600
Payment due from 18th May =£36,000 (backdated to 6th April 2008)
Payment due from some point in September (exact date yet to be confirmed), = £34,800 (backdated to 6th April 2008).
So what is the payroll impact?
At the time of writing, the actual detail was still awaited. Nevertheless, the options can be predicted.

The raising of the single person’s allowance can be undertaken through two methods:

A general uplift of tax codes (the type of uplift normally notified by the issue of notice P9X or P7X. So an instruction to uplift tax codes with suffix L and maybe others by 60 is likely.
HMRC notifying individual tax codes through the issue of P6 or P6B notices for all other employees who are entitled to the extra £600 in their personal allowance.
If a general payroll tax code uplift is the chosen method, then software needs to be checked to see if it’s capable. The issue of P6 or P6B notices should cause no problem.

The other element is a further change to the 40% tax band from a specified point in time. Pre-budget changes usually apply from 6 April of each year with the March budget changes being applied to payments made from 18 May, and on some occasions from 18 June. So the government is likely to announce a point in September when the 40% tax band is to be revised.

On a cumulative tax basis (only) these changes will result in individuals who continue to pay the Basic Rate of 20% receiving a £60 rebate offset against any tax liability in September. Of course, employees who are on a week-1/month-1 basis will only see an impact from their September payments and the effect will not be backdated! From then on, the tax liability will be reduced by the equivalent of £10 per month.

Software Impacts
The major challenge will be for in-house payroll software suppliers who will now be required to add a further unscheduled update to be distributed to their client base - at an additional cost to their businesses.

For more payroll hints and tips, visit Simon Parsons’ advice column.

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Article Source: http://www.upublish.info

About the Author:
Simon Parsons

Ceridian provides HR, payroll, EAP and HR consultancy services to over 50% of the Financial Times Global 500 and more than 75% of the Fortune 500. It is the largest payroll provider overall, and the second largest outsourced payroll processor in terms of revenue, with over 70 years' experience in payroll in the USA and 40 years in the UK. http://www.ceridian.co.uk/

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