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[MSE Wendy]

Updated 2 September 2008
(Comments in the discussion may relate to earlier incarnations of this information)

After the huge '10p tax row' in April, the Government upped everyone's income tax personal allowance (the amount you pay no tax on) from £5,435 to £6,035 to make up for it.

This takes effect next Sunday (7 Sept), so if you earn between £6,035 and £40,835, watch your payslip to ensure you get the extra cash.

What's the background?

In the government's 2007 Budget report, it got rid of the old 10% rate of income tax, and reduced the 'basic rate' from 22% to 20%. Yet when this change was implemented in April 2008, public uproar followed as people earning between around £6,000 and £15,000 actually brought home less pay.

To fix this imbalance, on 13 May 2008, the Chancellor announced everyone's tax-free Personal Allowance for 2008/09 (i.e. this tax year) would rise £600 to £6,035, to reimburse those who lost out when the 10p tax-rate was scrapped; and give a tax cut to many others.

What happens now?

Even though this was announced in May, personal allowances officially increase to £6,035 on 7 September.

For all basic-rate taxpayers the impact is a £120 gain; this money will go straight into your pay, with the first £60 coming in September, and an extra £10 per month for the rest of the financial year until next April.

You shouldn't need to do a thing in order to get this cash; if it doesn't appear in your next paypacket, speak to whoever deals with the payroll at your place of work.

Will this make up for the end of the 10% band?

If you are a basic-rate taxpayer earning £6,035 or more, you'll pocket £120 more over the year than you would have done before this announcement.

This will make up what you lost when the 10% band disappeared, unless you earn between £7,130 and £9,075, when you could still be up to £30 out of pocket compared to last year. The Govt says many will have had tax credit rises too and possibly balance this out, but if it applies to you read my full Benefits Check-up article to find out more.

Higher Rate Taxpayers won't gain (or lose)

For higher-rate taxpayers, the 40% threshold will shift down by £600 to £40,835, meaning most will earn exactly the same as they would have done (if you earn between £40,835 and £41,460, you make a small profit).

See the Chancellor's full statement from May 2008

For a bigger range of data and figures for overs 65s go to HMRC rates

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[Mikeyorks]

Originally Posted by MSE Wendy

The 10% income tax ‘starting rate’ will be removed for pensions
and earned income but will stay in place for savings.

A little more detail on that from the HMRC site (critical bits made bold) :-

There will be a new 10% starting rate for savings income only, with a limit of £2320. If an individual’s taxable non-savings income is above this limit then the 10% savings rate will not be applicable.

.... so if your non-savings income exceeds your personal allowances you will pay tax, initially, at the new rate of 20%. But if your non-savings income exceeds your personal allowances .... but by less than £2320 - then the balance can be off-set against any savings income at 10%.

Not easy to comprehend and creates a further level of complexity both for HMRC (because you'll have to claim .. as tax will have been deducted from your interest at 20%) and their customers? I know the 10% band existed before .. but it was a fixture. This new 'pseudo' band only exists if your savings (the top slice of your income) actually hit it.

[AHAR]

I'm not all that far into the positive side of the graph but at least the income tax reduction won't be completely cancelled out by my council tax and water rate increases...the increased cost of everything else will do that.
This year's pay rises should see me better off in the end though...

[simongregson]

Well, I am happy to be on the positive side of the graph. But I can't help but feel that there is something wrong with the worst paid workers being worse off, especially with the effect of other bills rising.

[meester]

Originally Posted by MSE Wendy

What is this all about?

In last year's budget, the Government announced changes to income tax to take effect in April 2008, next month. The amounts of tax we pay on our pension, salaries and savings is changing, meaning what we receive in our monthly pay cheques is likely to alter too.

What's going to change?

• The 10% income tax ‘starting rate’ will be removed for pensions
  and earned income but will stay in place for savings.
• The ‘basic rate’ of income tax will be dropped by 2% to 20%.
• The ‘higher rate’ of income tax stays the same at 40%.

Whereas before the tax was staggered in three bands, this has now been simplified to two bands, with the new figures being:

How does this affect you?

What this means in a nutshell is that, even if your salary is exactly the same in March 2008 and April 2008, you will take home a different amount of money. You can check exactly how much this’ll change for you using the calculator on Listentothetaxman. Pop in your salary, and do a check for this tax year 2007/08. Then click the 2008/09 tab underneath the results to see what it will change to in April.

Once you know what you'll be on, take a look at the Budget Planner. This will help you know where yopu are financially when the tax change happens.

Anyone earning less than £15,000 will actually bring home less salary but should be able to get a higher amount of working tax credit to balance it out. If this applies to you read my full Benefits Check-up article to find out more.

How your salary will be affected by the change in income tax (Source: Standard Life):

How to check you are paying the correct amount of tax

The end of the financial year is also a good time to check if you have paid the correct amount of tax over the last year. Read my full briefing on how to check your tax to see if you paid too much: Check your income tax

I have to say, I disagree with this summary.

Firstly, basic WTC is only £1800 a year, or £2,535 if you work full-time. A single worker will not receive a penny in WTC on £15k/year. He just loses £223 from the 10% tax increase on starting incomes. If you have children, then, yes, you will be better off, due to the hike in CTC, and also the increase in income before tax credits are taken off you. As well, as this, workers under 25 cannot get WTC without children, and nor can workers over 25 unless they work full-time. So quite a few people worse off.

In addition, to this there is an increase in tax of 10% on incomes just below the higher rate allowance, targeted to hit mid and higher earners:

2007/08:

National Insurance paid @ 11% on incomes from £5,200 up to £34,840.
1% above £34,840

2008/09

National Insurance paid @ 11% on incomes from £5,460 up to £40,040
1 % above £40,040.

The NI payable on an income of £40,040, goes from £3,260.40 + £52 = £3310.40 to £3803.80. A tax rise of £493.40. Quite a lot.

The other thing with the changes, is that they have not uplifted them with inflation in the graph.

If you earned £42,000, then that should rise by 2.5% just to stay at the same level.

So last year, you would pay:

£223 10% IT
£7,121.40 22% IT
£870 40% IT
£3260.40 11% NI
£71.60 1% NI
= £11,546.40

This year on £43,050 you would pay:
£7,200 20% IT
£646 40% IT
£3803.80 11% NI
£30.10 1% NI
= £11679.90

Dividing this year's tax bill by 1.025, gives £11395. Which means tax has only really fallen £150/year for these earners, not £300, which ignores inflation.

But the government has another NI hike schedulled for next year, of £140, which will wipe out any saving.

[Caterina]

I am really angry with the government with this budget, as I only earn around £7,000 per year my tax bill has been DOUBLED in a fell swoop! Up to now I have never reached the 22% mark as after allowance I only stayed within the 10%, now I shall pay 20% on the whole of my taxable income.

As always, the ones to lose out are the low earner and part timers, and usually these are women. So what's new....

Caterina

[earthmother]

One group I haven't heard mentioned in all the articles and programmes I've seen about this recently is those on taxable benefits.

My husband receives long term IB - he currently gets taxed on it to the tune of about £5 a week - his tax bill will, if I've calculated it correctly, almost double - it may only be a low figure still, but it will make a heck of a difference to us. And there's no money coming from elsewhere for us to balance things out with, unless someone knows otherwise.

[ShelfStacker]

The rich are better off... those on low incomes and working day to day are worse off. And this is a Labour government?

It's not much to me, maybe a fiver a month, but for christ's sake... they've got things a**e backwards! They need to be taxing the people who can afford it more!

[Kernow Kid]

Originally Posted by ShelfStacker

The rich are better off... those on low incomes and working day to day are worse off. And this is a Labour government?

It's not much to me, maybe a fiver a month, but for christ's sake... they've got things a**e backwards! They need to be taxing the people who can afford it more!

I couldn't agree more.
My partner and I earn uner £16k a year each, with no kids, a mortgage and a car, living in Cornwall.
We will now pay more tax, water rates, electric, gas, petrol, etc. etc.
If we are lucky we will get 2 - 3% pay rise.
This is already wiped out by the gas/electric alone.

The only way for us to get some cash back is to have kids!
Not an option.

[meester]

Originally Posted by Caterina

I am really angry with the government with this budget, as I only earn around £7,000 per year my tax bill has been DOUBLED in a fell swoop! Up to now I have never reached the 22% mark as after allowance I only stayed within the 10%, now I shall pay 20% on the whole of my taxable income.

As always, the ones to lose out are the low earner and part timers, and usually these are women. So what's new....

Caterina

Do you work part-time?

On £7k, the tax was

(£7,000 - 5225) * 0.1 = £1,775 = £177.50
plus NI
(£7,000 - £5200) * 0.11 = £198

=
£375.50

It's now, assuming 2.5% inflation, hence £7,175 salary:

(£7175 - £5435) * 0.2 = £348
plus NI
(£7175 - 5460) * 0.11 = £188.65
=
£536.65

which is equivalent to £523.56 before inflaiton.

So you pay an extra £148 of tax.


But if you work over 30 hours a week, and assuming you are over 25, you will be entitled to WTC, which has gone up for workers at this level. So I would suggest you work more hours, as the WTC should be about £1500/year on top of your wages.

[purpleivy]

Originally Posted by Caterina

I am really angry with the government with this budget, as I only earn around £7,000 per year my tax bill has been DOUBLED in a fell swoop! Up to now I have never reached the 22% mark as after allowance I only stayed within the 10%, now I shall pay 20% on the whole of my taxable income.

As always, the ones to lose out are the low earner and part timers, and usually these are women. So what's new....

Caterina

I'm in that triangle with you Caterina. Yes, my dh earns more than I do and will be better off..... OK, I'm not going to starve, because he shares what he has with me but it's the principle of the matter that I find

[carolineb23]

But you don't get tax credits unless you are living on your own do you? I have never been able to get them because I live with my partner even though my wages are low

[Chiddles]

But this doesnt include the tax free allowance though so the break-even threshold is £15000 plus the tax free allowance. Is that right???

[Suzkin]

I'm on WTC (earnings are less than £15kpa) and my wages are 'static' in that there is no pay rise from year to year (and no opportunity for progression or prospects - which feels even worse..). This means that even though I'm taxed more and to counter this, it appears the government might increase WTC, the overall effect means that I have become even more dependent on benefits than previously!

[meester]

Originally Posted by Chiddles

But this doesnt include the tax free allowance though so the break-even threshold is £15000 plus the tax free allowance. Is that right???

Not really.

It depends on your measure.

If wage inflation is 4%, then the break-even in terms of pecentage of income taken home comes at £18,320 (2007/08 money). Below this number you are worse off. Everyone above it is slightly better off.

[Imani]

well my employer may increase wages but i will not know about this untill i return. according to the listentotaxman i have lost a further 72+ quid so i will be worst off. i do get tax creds as i have 2 kids. i work 30+hours which is considered full time. but even worst i am on smp for a few more months, so i guess i will need to use my time off work to get a job working 25-30hours earning 15k or more. fingers crossed

[lovingheart]

Originally Posted by Caterina

I am really angry with the government with this budget, as I only earn around £7,000 per year my tax bill has been DOUBLED in a fell swoop! Up to now I have never reached the 22% mark as after allowance I only stayed within the 10%, now I shall pay 20% on the whole of my taxable income.

As always, the ones to lose out are the low earner and part timers, and usually these are women. So what's new....

Caterina

I am in the same situation and feel our Labour government betrayed workers on low incomes and brought more gloom and misery in their lifes. But what can you do?

[ManAtHome]

And if you're on standard-rate tax and pay into a pension it'll cost you more. At the moment it costs you 78p per pound you put in, from next year it'll cost you 80p.

[Paul_Herring]

Originally Posted by ManAtHome

And if you're on standard-rate tax and pay into a pension it'll cost you more.

Erm - no it won't; it'll cost you exactly the same.

On £100 gross pay, you currently get taxed £22 and contribute £78 from net pay to get the £22 refund to contribute £100.

Next year, £100 will be taxed £20, you pay £80 net, to get £20 refunded to contribute £100.

Any perceived increase in net contribution is offset by an increase in net pay.

[ManAtHome]

Errm yes it will - on £100 gross you'd currently be taxed less than £22, even on "average wage", things are much worse near the bottom end.