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National Minimum Wage set to rise on 1 October 2008 - Understanding the Changes to the Personal Allowance

The National Minimum Wage will increase again in October 2008

A quick reminder to let you know that the national minimum wage rates will change on 1st October 2008 as follows:

• The adult rate for workers aged 22 and over will increase from its current hourly rate of £5.52 to £5.73 per hour.

• A ‘development rate’ for workers aged 18 – 21will rise from the present hourly rate of £4.60 to £4.77 per hour.                                                                                      

• Young people (those older than leaving age and younger than 18; you’re under school leaving age until the end of the summer term of the school year in which you turn 16) is currently £3.40 per hour and will increase to £3.53 per hour.

Understanding the changes to the Personal Allowance and basic rate tax band in September 2008

The Chancellor announced that the basic Personal Allowance for the 2008-09 tax year will increase by £600 from £5,435 to £6,035. At the same time the basic rate tax band (the amount of taxable income you can earn before paying higher rate tax) will reduce from £36,000 to £34,800.

When and how the changes will take effect

If you’re under 65, or are 65 or over but only qualify for the basic Personal Allowance

If you’re an employee or receive a personal or company pension the changes will be reflected in wages and pension payments from September 2008. The allowances will be backdated to the start of the tax year (6 April).

If you’re 65 or over and qualify for the higher age-related Personal Allowance

If you qualify for the higher age-related allowances your tax allowances won’t change. Your higher age-related allowances were raised at the start of the tax year and you are already getting the benefit of these.

How the changes will affect your pay and tax

If you pay tax at the basic rate of 20 per cent

The changes take effect from the first pay day on or after 7 September and equate to a tax saving of approximately £120 over the course of the tax year. If your September pay day is on or after 7 September, you will pay up to £60 less tax that month. If you’re paid monthly and your September pay day is before 7 September, you will pay up to £70 less tax in October. How much your tax reduces will depend on how much you’ve paid already – and in some cases you might get a repayment as part of your pay.

After this if you’re paid monthly you will pay up to £10 a month less tax and if you’re paid weekly you will pay up to £2.30 less tax. (The actual figures will depend on your income.)

How the changes will affect your tax code

If your tax code ends with a letter ‘L’

If your tax code ends with an L then broadly speaking the number in the tax code multiplied by 10 is the amount of tax-free pay you are entitled to for the year.

Your tax code with automatically increase your by 60 - giving you the extra £600 of allowances announced by the Chancellor. For example the tax code 543L (showing the current Personal Allowance of £5,435) would change to 603L, taking your new Personal Allowance to £6,035.

More u turns, or just on his Magic Roundabout?

Although Alistair Darling has only been in post as Chancellor since June 2007, he has already announced a number of reversals in tax policy in that short period.

In October 2007 the Chancellor announced sweeping changes to the Capital Gains Tax rules which would have a detrimental effect formany business owners. In January 2008 he announced a significant concession in the formof Entrepreneur’s relief.Hehashad a roughridewithNon-Domiciles and subsequent changes.

More recently he has announced an increase to personal allowances by £600 to compensate basic rate tax payers for the loss of the 10%tax band announced in the 2007 budget.

Despite the slogan “Tax doesn’t have to be taxing”, these constant changesmake it extremely taxing to stayup to datewiththe changes.We keep ontop of the changes in order to identify for you the tax saving opportunities. In this edition of pay less tax we review what action you can take to save tax.