Tax ‘cuts’ are not good news for some

Employers should brace themselves for awkward questions from staff at both ends of the pay scale who will pay more tax or national insurance (NI) from April 6.

The chancellor’s decision to scrap to the 10 per cent tax band and reduce the basic rate of income tax from 22 per cent to 20 per cent means the lowest basic rate of income tax for 40 years.

But this is not good news for everyone, including some workers who can least afford a tax hike, according to Lynne Cramb, head of Payroll at business advisers DTE.  

“As a result of abolishing the 10 per cent starting rate, anyone earning £18,000 per year or less will pay more tax, while higher earners in the £35,000-£40,000 face a stiff increase in their NI contributions,” she explained.

“For example, a part-time employee earning £8,000 annually will pay £18 per month more tax, while a full-time colleague with a salary of £12,000 must pay the taxman an extra £11.50 each month.”

Meanwhile, the raising of the upper earnings limit for NI contributions means that employees with salaries between £35,000 and £40,000 must pay an extra ten per cent on an additional £5,200 of earnings.

As chancellor, Gordon Brown brought in the ten per cent starting rate and has since announced that it would be scrapped from April 2008.  Where previously the first £2,230 of taxable pay was assessed at ten per cent this income is now subject to the new 20 per cent basic rate.

Lynne added: “Most changes to the tax system produce winners and losers, but the impact of the alterations this year will result in extra liabilities among some employees who will have least expected it and can least afford it.

“As a result payroll departments would be well advised to prepare for a raft of difficult questions from understandably unhappy members of staff.”  

[back]