Saturday, August 16, 2008

Employee tax confusion following increase to Personal Allowance

Get ready for more employees to be confused about their tax situation than ever before.
This is because of the combination of the late change to personal allowances this year and the way that PAYE tax is calculated on a cumulative basis.

The £600 increase to the 2008-09 Personal Allowance takes effect on 7 September and will be backdated to 6 April. This means that the next pay packet (eg: at the end of September for monthly paid staff) will include 6 months worth of the increased allowance (for the period from April to September).

Staff will be aware that the increase in their net take-home pay will be because of the tax changes. The confusion will follow when they get their next pay packet as they will pay more tax than they did in September. The October pay packet will only reflect ONE more month's worth of the increased allowance.

Reduced tax in September: £300 x 20% = £60
Reduced tax in October and subsequent months: £600/12 x 20% = £10

In previous years the change to personal allowances and tax rates normally takes effect from May so the contrast between the first and subsequent months of change is much less pronounced.

1 comment:

  1. --and with NMW increases in October it will be even worse. if HMRC had been allowed to make the change in October it would have helped - we allegedly have a govt. policy of common commencement dates of April and October but that ignores political drivers!