Increase in basic rate tax allowance April 2012

Cosmiczippy

The front page of the Metro today tells us that the basic rate tax allowance is to rise from £7475 to £8105 on 01/04/12 - a difference of £630pa. It then goes on to say this will give us £12.60 a month extra in our pay packets. Should this not be £12.60 per week extra, as 12 x 12.60 is only £151.20. Have they got it wrong or is my maths not what it used to be.

sunshinetours

Both wrong on those figures. You get the tax relief at 20% on the extra allowance do 630 x 20% = £126 per year extra income

chrisbur

I make it £630 extra on allowances so £126 less tax (if paying at 20%)equals £10.50 less a month.

As sunshinetours says but I type slower.

Cosmiczippy

I am obviously completely ignorant of how income tax works, having always been a PAYE taxed employee. I thought that the personal allowance was a sum that was completely tax free (i.e. £7475 now and £8105 from 01/04/12) and that by 2014 we would only have to pay tax on any earnings above 10,000. Can you explain to me in REALLY basic terms how income tax is worked out please and how much is really completely "tax free".

sunshinetours

Nope you understand just fine!

The first £7475 (and from next tax year £8105) of income you earn is not taxed , so is income tax free or gets "tax relief" as you may see it written sometimes

Cosmiczippy

So why therefore when the tax free allowance is raised by £630 per year as per my earlier post, do we not get it in our salaries. That is the bit I do not understand. Sorry if you are gnashing your teeth at my stupidity!!

carolineb23

Because the tax free allowance increase means £630 a year that you do not have to pay any tax on (so instead of being able to keep 80% of that money any paying 20% tax on it, you get to keep 100% of it, not taking NI into account). It doesn't mean £630 a year extra money in your pocket.

sunshinetours

Put it into figures

£10k salary you will pay (roughly)

(£10,000 - £7475) x 20% = £505 pa in tax

Next year you will pay

(£10,000 - £8,105) x 20% = £379 pa in tax

So as you can see an increase of £630 in the personal allowance means you have paid £126 less in tax

Your employer is not paying you any more money - they are just deducting a bit less in tax and paying that over to the government on your behalf (which is how PAYE works)

Thinking of it another way, think of if we didn't get any personal allowance and all our income was taxed from the first pound onwards.
Then if we introduce a tax free allowance so you start paying tax later on after you have earned a bit, you are getting 20% tax relief on that part of the money aren't you

jennifernil

Because it's an increased tax free allowance, not a pay rise.

Mikeyorks

Cosmiczippy wrote: »

I am obviously completely ignorant of how income tax works, having always been a PAYE taxed employee.

I am obviously completely perplexed as to why you consider it's OK'ish to not understand 'because you're on PAYE'!

It's the same tax you're paying as though you were self employed. And things can go wrong on PAYE more frequently than in Self assessment - so it's essential to make an effort to understand why your biggest bill is what it is. And how it's made up.

On your question. The extra £630 means there will be £630 more of your income which is now tax free - that you used to pay tax at 20% on? So you are 630 x £0.20 better off.... = £126pa

Cosmiczippy

I think some of us on PAYE are a bit remiss about checking our tax deductions (like me!) and just assume they are correct - I shall know better in future. Thank you to those who took the time to explain how it works. Can't think how I am going to spend all of that extra money - oops too late,:beer: its already gone!