PAYE Procedures – Applying the 50% additional rate of taxFriday, January 15th, 2010
This is an adjustment to the item that appeared in the last newsletter of 2009. The explanation confused the way in which HMRC will handle two tax changes from April 2010, namely (1) the new 50% additional rate of tax and (2) the reduction to the personal allowance for individuals with an annual income of £100,000 or more.
A new “additional” higher tax rate of 50% is introduced for the 2010/11 tax year and applies to all taxable income, including savings income, above the £150,000 higher rate limit. The Finance Act 2009 made no reference to this change; it should be expected to be included in the Finance Bill for 2010.
The tax due when earnings exceed the higher rate limit will be handled, from April 2010, by new tax table calculations. These will appear in HMRC’s published tax tables for 2010/11 and payroll system developers have been provided with new technical specifications and test data.
It might have been expected that, for higher-paid employees with more than one job, the new 50% rate of tax would prompt the return of tax code D1, the equivalent of tax code D0 but requiring all earnings to be taxed at 50%. The current computer specifications for PAYE tax table routines define the use of tax codes D1 and even D2 for higher rates of tax. Most, if not all, computerised payroll systems are capable of handling tax code D1.
HMRC’s explanation for not using a D1 tax code is that,
“in the time available it was not possible to introduce a new D1 tax code for those circumstances where an individual has a subsidiary source of employment income liable to tax at 50%. In addition the tax codes for those individuals liable to tax at 50% will not include any adjustments to take account of the additional rate of 50%. It is our intention to introduce these changes from the 2011-12 tax year.”
The other key tax change from April 2010/11 is the removal of some or all of the personal allowance when an individual’s annual income exceeds £100,000. This will be handled by means of an adjustment to the individual’s tax code for 2010/11. HMRC will estimate how much of the personal allowance will be lost and notify the employer and the employee by issuing a coding notice.
As individuals with annual income of £100,000 are required to complete a self-assessment tax return, any final adjustments to tax liabilities for 2010/11 as a result of both the new 50% tax rate and the personal allowance reduction will be made after the tax return for that year has been processed.
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