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Understanding the changes to the Personal Allowance and basic rate tax band in September 2008

Following an announcement by the Chancellor 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 tax band (the amount of taxable income you can earn before paying higher rate tax) has reduced from £36,000 to £34,800.

This guidance tells you when, whether and how the changes will affect you.

When and how the changes will take effect

If you’re under 65, or are 65 or over but only qualify for the basic Personal Allowance

If you’re an employee or receive a personal or company pension the changes will be reflected in wages and pension payments from September 2008. The changes have been backdated to the start of the tax year (6 April).

If you pay tax through Self Assessment, the new allowances will be taken into account in your Self Assessment tax calculation and tax bill for 2008-09.

If you’re 65 or over and qualify for the higher age-related Personal Allowance

If you qualify for the higher age-related allowances your tax allowances aren’t changing. Your higher age-related allowances were raised at the start of the tax year and you are already getting the benefit of these. For more information read the later section, If you’re aged 65 and over – further guidance.

How the changes affect your pay and tax

If you pay tax at the basic rate of 20 per cent

The changes take effect from the first pay day on or after 7 September and equate to a tax saving of approximately £120 over the course of the tax year. If your September pay day is on or after 7 September, you will pay up to £60 less tax that month. If you’re paid monthly and your September pay day was before 7 September, you will pay up to £70 less tax in October. How much your tax reduces will depend on how much you’ve paid already – and in some cases you might get a repayment as part of your pay.

After this if you’re paid monthly you will pay up to £10 a month less tax and if you’re paid weekly you will pay up to £2.30 less tax. (The actual figures will depend on your income.)

If you pay tax at the higher rate of 40 per cent

The changes only benefit basic rate taxpayers. To find out more read the later section If you’re a higher rate taxpayer.

How the changes affect your tax code

Your employer or pension provider has adjusted your tax code based on information that we sent them.

  • All tax codes that end in L have increased by 60.
  • Codes P, V, Y, BR, D0 or NT are staying the same.
  • Other codes may change, but this depends on your particular circumstances and we will also write to you about this.

To find out more read the relevant section below.

If your tax code ends with a letter ‘L’

If your tax code ends with an L then broadly speaking the number in the tax code multiplied by 10 is the amount of tax-free pay you are entitled to for the year.

We have told your employer that they can automatically increase your tax code by 60 - giving you the extra £600 of allowances announced by the Chancellor. For example the tax code 543L (showing the previous Personal Allowance of £5,435) has changed to 603L, taking your new Personal Allowance to £6,035. We aren’t writing to you separately about your new tax code unless something else changes which doesn’t relate to the Personal Allowance adjustment.

If you have asked us to set some of your allowance against another job or pension, we have added the extra personal allowance to the tax code for what our records show is the main one.

If your tax code starts with a letter ‘K’

You will have a K code if your overall untaxed income is greater than your tax allowances (the tax-free Personal Allowance and any other allowances to which you’re entitled). Broadly speaking, the K code number multiplied by 10 indicates how much must be added to your taxable income to make sure you pay the right tax overall.

If you currently get the basic Personal Allowance (as opposed to the higher age-related Personal Allowance) your K code number has reduced as a result of the changes (which means you’ll pay less tax) – and it’s even possible that you will no longer need a K code. Either way, we have written to you and your employer with a new code and your pay will be adjusted from September/October as described earlier.

If your tax code ends with a letter ‘T’

If your code ends with a T, it usually means that it’s been adjusted to take account of changes that will need to be reviewed again before or at end of the year.

Where possible we are using the change to the basic Personal Allowance to make adjustments to help get you off the T code as early as possible. We will send you and your employer details of any change needed, and your pay will be adjusted from September/October as described earlier.

If your tax code ends with letters P, V or Y

These codes relate to age-related tax allowances and in this instance are staying the same because you are already receiving the benefit of the increased age-related Personal Allowance which came into effect in April.

If you have BR, D0 or NT tax code

These tax codes are used where you have more than one job and/or pension. Therefore BR, D0 or NT tax codes aren’t changing.

If your code is operated on the ‘special basis’

Your PAYE Coding Notice (usually sent to you at the start of the tax year, but also at other times - to tell you which tax code you’re on) may state that your tax code is operated on the ‘special basis’. This means we tell your employer or pension provider to ignore previous earnings and tax paid this tax year when working out your tax. You will be on a special basis code either because we are waiting for missing information about your previous tax and pay or because there has been a change which could lead to an underpayment of tax by the end of the tax year.

In this case you’ll get the benefit of the £10 a month or £2.30 a week reduction from September 2008 but we won’t know if you’ll get the reduction backdated to April until we have the information we need about your previous tax and pay or until we have reviewed your total tax liability after 5 April 2009.

Note that when applying the new Personal Allowance rate we’ve reviewed all special basis tax codes and, where possible, have taken the opportunity to move whoever we can back onto a normal tax code (which means that you will get your Personal Allowance backdated). If we’ve needed to keep you on the special basis code following the review you still get the benefit of the £10 tax reduction from September 2008 to April 2009, in April 2009 we will then check your actual tax position for the whole year.

If your tax code changed before 7 September for another reason

We continued changing individual tax codes where necessary before 7 September (based on individual changes of circumstance) and using the current Personal Allowance of £5,435. If your tax code changed during this time it will still have been changed again in September when the revised Personal Allowance of £6,035 came into effect.

If you’re student and get tax-free pay

If you’re a student working solely in the holidays and you’ve already signed a form P38(S) for 2008-09 to get paid tax-free and your total earnings for the year go above £5,435 but will stay below £6,035 you must contact your employer and complete another P38(S) or equivalent record.

If your earnings go above £6,035 you’ll need to pay tax through your employer’s PAYE (Pay As You Earn) system. In this case you’ll get the benefit of the new Personal Allowance through your tax code.

If you’re a higher rate taxpayer

The changes announced by the Chancellor are designed to benefit basic rate taxpayers only. Higher rate taxpayers will pay the same amount of tax as before. This is because while the basic Personal Allowance has been increased by £600, the threshold at which you start to pay higher rate tax has been reduced by £600 - achieved through a £1,200 reduction to the basic rate tax band.

Illustration

Before the September changes, higher rate tax was payable on income above £41,435. This higher rate threshold’ was the combination of the earlier basic Personal Allowance (£5,435) and the earlier basic rate band (£36,000).

After the recent changes the basic Personal Allowance has increased by £600 to £6,035 but the basic rate tax band has reduced to £34,800. When added together these last two make the new higher rate threshold £40,835 – which is £600 lower than it was previously.

Worked example for higher rate tax payer following the changes to the basic Personal Allowance and basic rate tax band

Rates before 7 September

Gross Taxable Pay £55,000
Less Personal Allowance £5,435
Taxable £49,565

20% on £36,000 = £7,200
40% on £13,565 = £5,426
Total tax due = £12,626

Rates from 7 September

Gross Taxable Pay £55,000
Less Personal Allowance £6,035
Taxable £48,965

20% on £34,800 = £6,960
40% on £14,165 = £5,666
Total tax due = £12,626

If you’re aged 65 and over – further guidance

There are no changes to the full (age-related) Personal Allowance of £9,030 for an individual aged 65 to 74 and £9,180 for individuals aged 75 and over. So an individual with a tax code ending in V, Y or P isn’t getting a new code number.

(The full age-related Personal Allowance amount is only available if your income is below £21,800. If your income is more than this, your allowances are gradually reduced down to the level of the basic Personal Allowance. In this case you will have a tax code ending in L or T. See above for what may happen if you have one of these tax codes. As described earlier, if your level of income means you only get the basic Personal Allowance then you get the new rate of £6,035.)

Effect on other tax allowances and National Insurance

Blind Person’s Allowance, Married Couple’s Allowance and Income limit for age-related allowances

These allowances are unaffected by the changes.

National Insurance contributions

National Insurance rates and thresholds remain the same.

Effect on attachment/arrestment earnings orders

Most people will pay less tax because of the changes. As a result you will have more earnings for your attachment/arrestment. This in turn may mean that you’ll have more deducted for the attachment/arrestment. The effect depends on your individual circumstances and the type of attachment/arrestment.

However, if you already pay the full amount due for child support or maintenance each payday the change won’t affect your attachment/arrestment deductions.