Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

Impact of Revised 2008/09 Tax Allowance

Newsletter issue - June 08.

Although the changes in income tax rates (abolishing the 10% rate and reducing the basic rate from 22% to 20%) were announced in March 2007, most people took very little notice at that time. When the new rates took effect in April 2008 there was an almighty fuss. Due to the loss of the 10% band those on lower wages began to pay more tax, and as the basic rate had been cut to 20% those with taxable incomes between about £18,000 and £35,000 had lower tax deductions.

After much dithering the Chancellor proposed a crude solution, which will not fully reimburse those on the lowest incomes who have lost out. The personal allowance for 2008/09 has been increased by £600 to £6,035 and the higher rate tax threshold has been reduced by £1,200. These changes are effective for the current tax year that started on 6 April 2008, and should result in a tax reduction of about £120 for basic rate taxpayers for 2008/09.

There are 4 main effects to consider...

1. If you run a payroll you are not expected to implement these changes until at least September 2008. HMRC have said they will issue instructions in the next few weeks on how the higher allowance and lower 40% threshold should be handled for PAYE purposes. The most straightforward solution would be to reissue all 22 million PAYE code numbers for 2008/09, but that would be very expensive for HMRC. We will let you know as soon as HMRC have decided what to do.

2. If you are self-employed you will not feel the full effect of the tax reduction until 31 January 2010, when you pay your final tax bill for 2008/09. You may be able to reduce your tax instalment payments due on 31 July 2008 and 31 January 2009, but that will be risky unless you know the level of profits that will be taxed for that year. We will only be able to work this out accurately once your accounting year finishes and your accounts are finalised.

3. As a shareholder/ director you may be used to drawing a salary exactly equal to your personal allowance, which is now £503 per month. However, if you increase your current salary above £453 per month you will pay more NICs as the earnings threshold, where NICs become payable at 11%, has not moved up with the personal allowance.

4. If your total income exceeds £41,435, you will see no difference in the tax you pay in 2008/09, but if you try to keep your income within the basic rate band you need to revise your calculations. As the higher rate tax threshold is now £34,800 not £36,000, you will need to restrict your dividend income to stay within that lower limit. Alternatively you could increase the pension contributions you pay by £480 (net).

  • Auto enrolment icon

    Auto Enrolment

    Workplace pensions rules are changing.
    Be prepared for auto enrolment, see how we
    can help and read up on our guidance notes.

    More

  • Cloud accounting icon

    Cloud Accounting

    With our online bookkeeping packages, our support
    services are only a click away.
    Discover cloud accountancy solutions to bring your finances up to date.
    More

  • Pay less tax icon

    Pay Less Tax

    Our experienced tax advisors can help you
    make the most of your options to reduce
    your tax bills.

    More

  • Make more profit icon

    Make More Profit

    From business plans to management accounts,
    our business services will ensure you are in
    control of your business finances.

    More

  • Source finance icon

    Source Finance

    Our experienced partners can guide you
    in getting the finance you need to make
    your business grow. Read our guides or
    contact us for a free consultation.
    More

  • Outsource your payroll icon

    Outsource Your Payroll

    Let us handle payroll compliance for your
    business. We can deal with HMRC on your
    behalf, and take the stress out of RTI.

    More