Annual Uprating of PAYE, NICs and related thresholds - Thresholds to increase by around 4% from April 2008

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25 October 2007

UK legislation requires the PAYE, NICs and related thresholds to rise each year in line with the Retail Price Index. They are increasing, from 6 April 2008, by 3.948% (i.e. the year-on-year increase at September 2007), rounded up according to the statutory rules in section 257C of the Income and Corporations Taxes Act 1988.

NICs thresholds

The NICs thresholds for 2007/08 and for 2008/09 are set out in the following Table. The increases are effective from 6 April 2008.

Notes:

* These values are specifically defined in statute. All other values are calculated according to statutory uplift and rounding rules.

¹ The weekly LEL is set at the rate of the basic state pension for 2008/09 (i.e. £90.70) and rounded down to the next whole pound.

² The RPI increase would suggest an increase in the weekly ET from £100 to £104. However, the statutory calculation requires the annual ET (set at the same rate as the personal tax allowance) to be divided by 52 and rounded up in order to obtain the weekly ET. This calculation gives £105.

³ The substantial increase in the UEL is the first stage of the process announced in the 2007 Budget to align, from April 2009, the UEL, the income tax basic rate limit (BRL) and the self-employed annual Class 4 NICs upper profits limit (UPL). The new UEL is set at the same level as the UPL from 6 April 2008. (See Tax Rates and Bands, below)

There are no changes to Class 1 NICs rates for 2008/09. However, see Contracted-out Rebates, below, for newly-announced changes that will apply for 2009/10.

Tax allowances

The tax allowances from 6 April 2008 are shown in the following Table. The increases are in line with inflation.

Note:

1 It was announced in the 2007 Budget that, from April 2008, the two age-related personal allowances would increase by £1,180 above the normal annual indexation increase - hence the over 19% increase. Indexed rises will be maintained in the following two years but, by 2011, the Government's intention is for the age 75 allowance to be £10,000.

The personal allowance for employees under age 65 is set at £5,435, the same level as the NICs earnings threshold. The new emergency tax code from April 2008 will be 543L and the weekly tax threshold will be £105. The change to L suffix tax codes will be made in bulk from the start of the 2008/09 tax year. Instructions will be provided on form P9X, to be issued in February 2008 on the Employer CD-ROM. The update will involve an increase in 21 points to all L tax codes.

Tax rates and bands

It was announced in the 2007 Budget that, from 6 April 2008, the 10% starting rate for earned income and pensions will be removed and the 22% basic rate of tax will be reduced to 20%. The band limit from which the higher rate of tax applies is expected to increase from April by the September 2007 RPI increase. The following rates and bands for 2008/09 are subject to confirmation in the 2008 Budget.

Instructions on how to implement the changes will be provided in the Employer's Budget Pack, sent out subsequent to the Budget, and will be applied on the first payday on or after a date in May or June 2008. Based on practice in recent years, the date may be 18 May, i.e. week 7, or 15 June, i.e. week 11.

The existing Taxable Pay Tables SR + B to D (dated May 2007) will continue to be used until the week in 2008/09 when the 2008 Budget changes are applied. The new tables for 2008/09 will be known as Taxable Pay Tables B to D.

From April 2008, the first stage of the alignment of the UEL, income tax basic rate limit (BRL) and self-employed upper profits limit (UPL) will have been implemented, giving the following figures:

• annual BRL - £41,435, i.e. £36,000, plus £5,435 personal allowance
• annual UEL - £40,040
• annual UPL - £40,040.

The level of earnings at which Class 1 NICs, Class 4 NICs and income tax start to be paid are already aligned at the Class 1 NICs earnings threshold, the Class 4 NICs lower profits limit and the income tax threshold - £5,435 for 2008/09. The objective, from April 2009, is to create the situation where the level at which (1) the basic rate of tax, (2) self-employed Class 4 NICs, and (3) the full rate of employee Class 1 NICs stop being paid are also aligned at the same value. At April 2009, the BRL will be increased again by inflation and the UEL and UPL will be increased to the same figure. After that, all three thresholds will be increased by a further £800.

To illustrate, if there were a 4% inflation increase at September 2008, the thresholds would increase as follows:

• annual BRL - £43,955, i.e. £37,500 (£36,000 + 4% rounded), plus £5,655 personal allowance (£5,435 + 4% rounded), plus £800
  
  
• annual UEL and UPL - £43,955, i.e. £42,120 (£770 + 4% rounded × 52), plus 1,035 top-up, plus £800.

Effect on employees and employers

Following the Pre-Budget Report and later publication of the NICs and tax changes, there was considerable comment in the press about "stealth taxes", particularly in connection with the large increase in the NICs upper earnings limit. The separate and combined effect of the NICs and income changes on employees and employers is demonstrated in the following Table.

The figures are for employees with NICs table letter A, tax code 522L in 2007/08, and tax code 543L in 2008/09. They use the same salary in both tax years so do not take into consideration the effects of an annual pay rise.



The Table shows clearly that there is no stealth tax effect from the increase in the NICs upper earnings limit. The NICs increase offsets the reduction in tax for higher-paid employees as a result of the fall in the basic rate of tax to 20%. The main losers from the changes are employees who are losing the benefit of the 10% tax band; in fact anyone earning up to £15,000 will pay more in tax and NICs overall. There is a small consistent saving for employers of about £27 for the year throughout the range of salaries.

Statutory payments

The weekly rates of SSP, SMP, SAP and SPP are also increased annually in line with the RPI each September but, at the time of publication, the new figures had not been issued. As the uprating rules are much less precisely defined in statute than they are for tax and NICs, we have not given any estimates. It is hoped, however, that, following a positive response from the Department for Work and Pensions in December 2006, the standard rate of SMP, SAP and SPP will be increased to a figure that is exactly divisible by 7. This will remove the rounding problems incurred by employers who make use of the facility to calculate these statutory payments using a daily rate.

...UK Payroll News - Latest

Further information:
HM Treasury Press Notice 109/07

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