Key changes to Income Tax from 6th April
The new tax year is nearly upon us, and there are 3 main changes which will affect how much you and your staff receive in your salary packet each month. The good news is that clients for whom we run the payroll for don’t need to take any action – we will process changes to the tax and NI rates as part of our payroll service.
The Personal Allowance
This is the amount that every taxpayer can earn tax free each year. This will increase by £1,000 from £6,475 to £7,475, increasing net earnings by £200 a year for a basic rate taxpayer. Company directors paying themselves a salary equivalent to the personal allowance will need to increase their monthly salary each month. Clients – our payroll department will contact you to discuss this.
The bad news is that April 2011 will also see a rise in National Insurance rates, from 11% to 12% for employees and from 8% to 9% for the self-employed. To protect low earners, the threshold for National Insurance will rise to £7,225.
Individuals with earnings above £42,475 will have National Insurance deducted at 2% on the uppermost slice of their pay, as well as National Insurance at 12% deducted from earnings below this threshold. Previously, employees would have ‘higher rate’ national insurance deducted from earnings of above £43,875, and this was only charged at 1%.
750,000 more 40% taxpayers from April
In additional to the personal tax free allowance of £7,475, those who have higher incomes will pay 20% tax on the next £35,000 they earn and 40% tax on any amounts above this, until they reach the highest rate of tax, 50%, paid on income above £150,000.
The threshold above which you pay 40% tax on taxable income has fallen from £37,400 to £35,000 to make sure that higher earners don’t benefit from the increase in personal allowance, which was designed to help low earners rather than taxpayers generally.
The changes mean that those whose income is over £42,475 (i.e. £35,000 plus personal allowance of £7,475) will pay 40% tax on their earnings above this amount.