Changes to employee Personal Allowance and basic rate tax band in September 2008
Following the Chancellor’s announcement earlier this year, the basic Personal Allowance for the 2008-09 tax year has increased by £600 from £5,435 to £6,035 and the basic rate limit has reduced from £36,000 to £34,800.
As a result, many employees' tax codes have now changed. This guidance tells you how these changes affect your payroll.
- How have employee tax codes changed?
- Applying the new tax codes
- Updated tools, tables and guidance
- Taking on a new employee on or after 7 September
- Student employees receiving tax-free pay
- The effect of the changes on employees’ pay
- If you need to refund tax to an employee
The table below summarises the changes you’ll need to make to your employees’ tax codes. You should have updated all codes with an L suffix without waiting for an individual P6 notice from us. Other codes only need to have changed if we sent you a P6.
Type of tax code
You should have added 60 to the previous tax code number in time for the first payday on or after 7 September. For example, old tax code 543L is now 603L.
Only changed if we sent you a P6 notice.
P, V or Y suffix
No change unless we sent you a P6 notice.
A or H suffix
These are no longer used so contact your HM Revenue & Customs office immediately if you have any of these tax codes.
NT, BR or D0
No change to these tax codes unless we sent you a P6 notice.
Only changed if we sent you a P6 notice.
Details of these changes are also be included in a revised form P7X(2008)(2). This is available online – see link below – and on a revised Employer CD-ROM that we sent to you in August.
If we needed to send you an individual P6 notice to update an employee’s tax code, it will have been dated 24 August. There are no further tax code notices between that date and 14 September.
If you get your tax codes online, these P6 tax code notices are available to download or view through our Data Provisioning Service (DPS).
The new tax codes must be used from the first payday on or after 7 September 2008.
If you operated your payroll before having an opportunity to apply the new tax code notices please reassure your employees that they will see the benefit of their increased allowance in October.
We have updated all the relevant tools, tables and guidance to make sure you have all the information relating to the tax code changes.
There are links to these updates in the list below, and they are also included on the revised Employer CD-ROM 2008 (August) Edition that we sendt you in August.
If you had initially asked us to send you paper versions of any of these publications, then we have send your updates in the same format. You can also order paper versions from our Employer Orderline.
The changes we have made include:
- an updated P11 Calculator, available only on the revised Employer CD-ROM 2008 (August)
- an updated PAYE Tax Calculator
- a new edition of Employer Helpbook E12(2008)(3) 'PAYE and NICs rates and limits for 2008–09' (for use on or after 7 September 2008) (PDF 53K)
- an update to Employer Helpbook P49 'Paying your employees for the first time' (PDF 75K)
- an update to Employer Helpbook E13 'Day-to-day payroll' (PDF 56K)
- an update to our online guide ‘New employee: using the right tax code
- new Taxable Pay Tables – Manual Method (for use on or after 7 September 2008) (PDF 59K)
- new Taxable Pay Tables – Calculator Method (for use on or after 7 September 2008) (PDF 72K)
- revised form P38(S)(2008)(2) (PDF 34K)
Note that Tax Tables A are not being changed, so you can continue to use the existing version.
Now that their replacements are in use, you must destroy:
- any earlier versions of the Employer Helpbook E12
- Taxable Pay Tables (May 2008)
- any unused stock of form P38(S)(2008)
To decide which tax code you must use for a new employee who starts work for you on or after 7 September, you will need to follow the instructions in the updated version of our online guide New employee: using the right tax code.
These instructions are also included in the updated version of Employer Helpbook E13, 'Day-to-day payroll' (PDF 56K), which you should use as follows:
For new employees with a P45
Use the guidance at step 3 on page 23 of the updated PDF version of E13.
If you are using a printed version of the E13, follow the instructions in the E13 September supplement we have sent to you.
For new employees without a P45
Use the guidance on pages 25 and 26 of the updated PDF version of E13.
If you are using a printed version of the E13, you must use both the instructions on pages 25 and 26 of the original helpbook and also the updated instructions for page 26 contained in the E13 September supplement.
A new form P38(S)(2008)(2) is available for use on or after 7 September which reflects the increased Personal Allowance of £6,035.
If you have students who have already declared on a form P38(S) that their earnings for the year will not exceed £5,435, these declarations can remain in place until the end of the tax year, unless following the introduction of the increased Personal Allowance it becomes apparent that a student’s income will exceed £5,435 but will not exceed £6,035. In these cases, a P38(S)(2008)(2) or equivalent record must be completed.
The changes mean that employees paid on a monthly basis receive around £60 extra in September followed by an additional £10 a month until the end of the tax year.
For employees paid weekly there is an increase of around £53 in their pay for the week starting 7 September, followed by an extra £2.30 each week for the remainder of the tax year.
For employees who have paid less than £60 tax by the end of August this year, the September increase in pay matches the tax they had paid so far.
Employees on a Week 1 or Month 1 code
Employees on a Week 1 or Month 1 code get an increase of £2.30 per week or £10 per month from September. But they aren't able to get the full increase backdated to April until they are back on a cumulative code or until after the end of the tax year when we review their total liability.
Employees paying higher rate tax
The changes announced by the Chancellor are designed to benefit basic rate taxpayers only. Higher rate taxpayers still pay the same amount of tax overall as previously. This is because the increase in the Personal Allowance has been offset by a reduction in the threshold at which higher rate tax is payable.
Most employees receive the benefit of the increased Personal Allowance by paying less tax from September this year. But you may have employees who are now entitled to a refund of tax paid earlier in the year.
Making this kind of refund does not cost you anything. The usual process is for you to deduct the amount you need to refund from your next payment to us of PAYE tax, NICs, CIS or student loan deductions.
If you do not have sufficient deductions to cover the amount you’re refunding, you can apply to us for advance funding to make up the difference. We will send this to you as a cheque.
Remember that if you have no PAYE payments to make to us in any tax month or quarter, you must tell us. This lets us know that we don’t need to issue a payment reminder.