Employers not ready for Personal Allowance Increase

Personal Finance

Employers are unprepared for the increase in personal income tax allowance which comes into effect this month, tax experts have warned.

Personal Finance

From 7th September, the basic tax–free allowance for employees will increase by £600, from £5,435 to £6,035, giving most employees an extra £120 a year. The increase was announced by the Chancellor in May following his decision to scrap the 10 pence tax band.

Because the allowance will be backdated to the beginning of the tax year, most employees’ pay packets will contain £60 more than usual in September – but only £10 more thereafter. Mark Lee, chairman of the Tax Advice Network said:

“Staff may be aware that the increase in their take–home pay will be because of the tax changes. However, the confusion will follow when they get their next pay packet as they will pay more tax than they did in September. This is because the October pay packet will only reflect one month’s worth of the increased allowance,”

“Changes to personal allowances and tax rates normally take effect from May so the contrast between the first and subsequent months of change is usually much less pronounced,” he added.

Earnings at which employees pay the higher 40% tax band are also being reduced. Currently employees can earn £36,000 on top of their personal allowance before paying then higher tax. From 7th September, this will fall to £34,800.

This means that anyone earning more than £40,835 must now pay the higher rate of tax, compared to £41,435 previously. As a result, more employees will fall into the higher tax bracket.

Chas Roy Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said it was likely that smaller businesses would find the changes most difficult to deal with.

“Firms, especially those with non–computerised payroll systems, need to make sure they are fully up to speed with the new allowances, and be aware that there will be an adjustment for most staff. Owners in any doubt should speak to an accountant or get in touch with HM Revenue & Customs,” he advised.

Read the HMRC guide to changes in the personal allowance at the HMRC website

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