Budget Solution to 10% Band Uproar
The chancellor, Alistair Darling has announced his solution to the uproar created by the abolition of the 10% tax band. His new proposal is to increase the personal allowance for 2008/09 by £600 giving tax payers an extra £120 in the current year.
The removal of the 10% tax band was announced over a year ago in Gordon Brown’s final budget as chancellor, but it was not until this year when his proposal took effect that opposition to the bands removal started to occur.
Alistair Darling’s new proposal to increase the personal allowance to £6,035 will only compensate those who pay tax at basic rate. To ensure higher rate tax payers do not benefit as well he also announced that the basic rate limit will be reduced to £34,800 from £36,000. The chancellor actually made a mistake in his speech announcing it would be lowered by £600 which would have still meant higher rate tax payers gained, this was later corrected on HM Revenue & Custom’s website to state it would be lowered by £1,200 resulting in no benefit or loss to those who pay tax at higher rates.
The question that is still posed though is whether this solution was enough to remedy the abolition of the 10% tax band? The answer is ‘yes’ for those who earn over £10,500 but for those earning less, will still be worse off than they were in 2007/08. Surely this new solution doesn’t really achieve the initial aim to compensate those on the lowest income.
The change is to take effect from September for PAYE purposes when basic rate tax payers can expect to see an extra £60 in their pay for the month and an extra £10 per month thereafter until the end of the tax year. It is not good news for employers though who will have to administer the change with new tax codes, tax tables and software updates all having to take place in the same month. For payroll departments everywhere this can only increase the time it will take to process the payroll in September.
Taxpayers should be aware that the change does not apply to National Insurance with the Earnings threshold still remaining at £105 per week. This means we return to a time when the level at which National Insurance and tax starts to be paid differs once again.
This announcement represents yet another change to a change, when will the government finally start to get their legislation right before they announce it?