Increase in personal allowances

26 August 2008

In response to concerns about the abolition of the ten per cent band of tax a further increase in the basic personal allowance was announced in May of this year. To give time for the adjustment to be legislated for and for preparations to be made to inform employers, the increase and the related change to the higher rate threshold will be implemented after September 6.

Those who are employed will have a tax adjustment made in their September pay packet (provided they are paid on or after 7 September and are taxed on the normal cumulative basis). The tax reduction is likely to be £60 for most staff. Those entitled to the higher personal allowance for those aged 65 and over will not receive any increase, as their allowances had been increased significantly in the Finance Act in any event, so they do not receive any more allowances as a result of the late changes. Higher rate taxpayers will also not benefit from the increase, as although the personal allowance has increased, the higher rate threshold has been reduced, so that their tax bill remains unchanged.

Employers will be receiving a further Employer CD ROM with the updated tax tables and other information they need to make the change.

Where employers need to refund employees affected by the increase in personal allowances, they may end up paying out more to their employees in tax refunds than they collect in tax and NIC in that pay cycle. This would put some smaller employers out of pocket until the following pay cycles when the tax and NIC due to HMRC will cover the amounts refunded. Where employers believe that they need advance funding for payment of tax refunds in September, they may apply for it now.