PAYE Income Tax – Tax rates, thresholds and allowances

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Summary
There are no changes to the 20% and 40% tax rates.  As previously announced, earnings above the £150,000 “higher rate limit” are taxable at the new 50% “additional” rate of tax.

There is no change to the £37,400 basic rate limit.  The 20% tax rate applies on taxable earnings up to £37,400.  The 40% tax rate applies on taxable earnings between £37,400 and £150,000.

There are no changes to any of the tax allowances.  The personal allowance remains at £6,475 and the emergency tax code continues to be 647L.

Detail

Sections 21 and 57 of the Income Tax Act 2007 require the basic tax rate limit and tax allowances to be increased automatically each year if the retail price index (RPI) for the September before the start of a tax year is higher than it was for the previous September.  The year-on-year change in the RPI at September 2009 was -1.4%, compared with +5% at the previous September.  The basic rate limit and tax allowances, therefore, are not being increased for the 2010/11 tax year.  The emergency tax code remains 647L.

This negative inflation situation was anticipated in the 2008 Pre-Budget Report (PBR2008).  The Chancellor, at that time, announced what was effectively a two part increase in the personal allowance from April 2009, i.e. the statutory 5% increase, from £6,035 to £6,345, and an additional £130, raising it to £6,475.  This additional £130 increase required separate Parliamentary approval and was part of the Government’s measures to promote spending during 2009 on the basis that there would be no increase in the personal allowance from April 2010.  In fact, specific provision was made in the Finance Act 2009 to prevent the personal allowance from being increased automatically from April 2010 if, contrary to expectation, the September 2009 inflation rate were above zero.  The automatic inflation-linked increase to the personal allowance resumes from the 2011/12 tax year.

The 2009 Pre-Budget Report (PBR2009) makes the following changes from April 2010.

The “basic rate limit” remains at £37,400 for 2010/11.  This defines the range of earnings on which tax is due at 20%.  When added to the personal allowance of £6,475, the resulting figure, £43,875, is the “higher rate tax threshold”, above which a person with a 647L tax code starts to pay tax at the 40% higher rate.  Between 2007 and 2009, the higher rate tax threshold was aligned in stages with the Class 1 NICs upper earnings limit and the Class 4 NICs upper profits limit.  That alignment is maintained in 2010/11.

The only change to tax thresholds, already in place in legislation, is the new “higher rate limit”, which defines the point at which the new 50% “additional” tax rate applies.  The higher rate limit for 2010/11 is £150,000.  There is no change to the 20% “basic” rate and 40% “higher” rates of tax.  There is no provision for automatic inflation increases to the higher rate limit.

No new arrangements were announced for the 2011/12 tax year although PBR2008 announced that the basic rate limit for 2011/12 will be held at its 2010/11 level.  Assuming that there is positive inflation in September 2010, it should be expected that the other tax thresholds and tax allowances for 2011/12 will be increased in line with inflation.

For the 2012/13 tax year, however,

• the personal allowance will be increased in line with inflation,
• the basic rate limit will be reduced by the same amount as the increase in the personal allowance, and
• the higher rate limit will not be increased at all.

The following Table shows the tax allowances for 2010/11.

Note: *The tax relief on the married couple’s allowances is restricted to 10%.

The following Table shows the basic and higher tax limits for the 2010/11 to 2012/13 tax years.  The figures in italics are speculative, dependent on the inflation rates in September 2010 and September 2011.

Notes:  * assuming a tax code of 647L

† assuming an inflation rate at September 2010 of 2%

‡ assuming an inflation rate at September 2011 of 3%

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This entry was posted on Friday, December 18th, 2009 at 12:32 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.