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Tax allowances for basic rate tax payers were increased during 2008 as compensation for the abolition of the 10p tax rate in April 2008. The basic personal allowance for the 2008-09 tax year has been increased by £600, from £5,435 to £6,035. This has the effect of reducing a basic rate taxpayer’s bill by £120.
Most employees receive the benefit of the increased personal allowance by paying less tax from September 2008. For employees paid on a monthly basis this will take the form of a £60 tax reduction in September 2008 followed by an additional £10 a month until the end of the tax year. For employees paid weekly there is an increase of around £53 in their pay for the week starting 7 September, followed by an extra £2.30 each week for the remainder of the tax year.
Self employed people will be able to claim the increased tax allowance as part of their tax return for the 2008/09 tax year.
The effect of the increased tax allowance is incorporated in the calculator – the net earnings figure we show is the amount you should receive on a continuing basis due to the higher allowance.
Pensioners will not benefit from the increased tax allowance as they already received compensation for the abolition of the 10p tax rate in the form of a higher tax allowance introduced in April 2008.
The changes are designed to benefit basic rate taxpayers only. Higher rate taxpayers will not benefit from the increased tax allowance and will still pay the same amount of tax overall as previously. This is because the increase in the basic personal allowance has been offset by a reduction in the threshold at which higher rate tax is payable from £36,000 to £34,800.
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