Tax Rates and Thresholds - Implementation date for the 2008/09 changes

View the previous news item for Pre-Budget Report 2007

15 November 2007

In our recent newsletter, we indicated that the removal of the 10% Starting Rate and the reduction in the Basic Rate to 20% would be effective from 6 April 2008 but would not be introduced until week 7 of the new tax year, i.e. on the payday falling on or after 18 May. This has been the normal implementation date over the past few years, varying only when the date of the annual Budget has been too late for HMRC to meet that deadline.

This normal arrangement has been queried by some payroll system developers following publication by HMRC of revised Specification for PAYE Tax Table Routines. These specifications, in Schedule A, indicate that payroll systems should introduce the changes from the start of the 2008/09 tax year.

After querying this with HMRC, one developer received the following reply:

"The announcement by Gordon Brown (in his capacity of Chancellor of the Exchequer) at the 2007 Budget is just an announcement of intent by a Government Minister. There is currently no legislative cover for any changes to tax deduction from 6 April.

If this is brought in we will have a 10% rate band against nil income for PAYE (Important to stress that the 10% still remains, but it just doesn't apply to PAYE income). The 22% basic rate will be reduce to 20%, and the 40% band will stay at 40%. The tax band widths have not been announced so we are staying with 20% up to 34600, 40% above 34600."

The absence of any statutory basis for the tax rate and threshold changes until the annual Budget appeared to suggest that the normal process would be followed and payroll systems would be updated from week 7 of the new tax year. We therefore sent our own query to HMRC about the apparently contradictory instructions given in the technical specification.

The reply from HMRC makes it clear that the new structure is to be applied in full from 6 April 2008 - not from week 7 of the new tax year. The text of HMRC's reply is as follows:

"Employers and pension providers should apply the new structure and rates of income tax for 2008-09 through their PAYE systems from 6 April 2008.

HMRC issue a new Employers' PAYE pack, including new PAYE tax tables around 17 or 18 May after the start of the tax year. That timing causes no problems for employees' pay or employers' payrolls by way of a large tax deduction or reduction because generally we do not anticipate that Parliament will change the rates of income tax.

The situation for 2008-09 is a little out of the ordinary, because the Chancellor announced the removal of the 10% rate for earnings and pensions and the reduction in the basic rate to 20% at Budget 2007. Broadly speaking, the Chancellor announces that sort of thing at the Budget immediately preceding the start of the tax year. But unless the 2008-09 changes are applied by employers and pension providers from 6 April 2008, it could result in a large deduction of tax from an employer's/pensioner's pay in May. So, in the reasonable expectation that Parliament will enact the Chancellor's announcements, HMRC is asking employers and pension providers to operate the new structure and rates through their PAYE systems from 6 April 2008.

On our legislative cover, income tax is an annual tax which is re-imposed each year by Parliament through the Finance Act. The Finance Act usually receives Royal Assent in July following the start of the tax year. But a key feature of the tax system is that measures announced at Budget can have effect before the Finance Bill is enacted. The Provisional Collection of Taxes Act authorises the imposition of taxes or changes in their rates until the Finance Act receives Royal assent. It does that by authorising the Budget resolutions which the Chancellor tables as soon as he has finished his Budget speech.

Given the announcements at Budget 2007 and confirmed at the recent Pre-Budget Report, we anticipate that the Chancellor's Budget 2008 resolutions will include that the 10% rate will no longer apply to earnings and pensions and there will be two main rates of income tax as noted above.

On the rate band widths, there is a statutory provision that they are increased each year by indexation. In the usual way, we will make an Order at Budget 2008 to confirm the rate band widths. Of course, it is open to Parliament to change the rate band widths as it sees fit. For 2008-09, the Chancellor has made no announcement about doing anything other than increasing the rate bands widths by indexation."

The effect, therefore, is that the new structure will be introduced from 6 April 2008, but using the existing basic rate threshold. The increase in the threshold, from £34,600 to £36,000, will apply from week 7 if it is confirmed by the Chancellor in the Budget.

The change in structure from 6 April 2008, expressed in payroll terms, is:

2007/08
Tax Rates	Taxable Pay Bands
Starting rate, 10%	£0 - £2,230
Basic rate, 22%	£2,230 - £34,600
Higher rate, 40%	Over £34,600

2008/09
Tax Rates	Taxable Pay Bands
-	-
Basic rate, 20%	£0 - £34,600
Higher rate, 40%	Over £34,600

In practical terms, however, as defined in the Specification for PAYE Tax Table Routines, computerised payroll systems will retain the starting rate band but define it as having a nil bandwidth, as follows: