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PAYE overload

31 Dec 08

Donald Drysdale points out that Alistair Darling’s plans to increase tax on the better-off will introduce an anomaly that could have wide-ranging effects

by Donald Drysdale

Alistair Darling has used political expediency as an excuse to undermine a fundamental principle of income tax, thereby going against his stated aim of simplifying the tax system. The personal allowance, exempting the first slice of income from tax, will no longer be given to every taxpayer.

A personal allowance of £60 was granted to each taxpayer when a temporary income tax was first introduced by William Pitt the Younger in 1799. When Sir Robert Peel reintroduced the tax in 1842 as a permanent levy, the personal allowance remained a feature, set at £150. In an unprecedented change from 2010/11, the personal allowance (currently £6,035) will be cut for those with incomes above £100,000, and withdrawn altogether where income exceeds £140,000.

Britain’s Pay-As-You-Earn system has been the fiscal envy of the developed world, collecting a comparatively accurate advance assessment of income tax and National Insurance contributions at source from most employment remuneration. However, it has been getting progressively more complex and difficult for the tax authority and employers to administer.

Payroll providers faced major headaches when Darling’s mini-Budget of 13 May altered personal allowances for the current year. PAYE will become unworkable from 2010/11 for those on high incomes, since the level of their personal allowance will not be known in advance. Ongoing government proposals to extend PAYE coding to collect tax and NI contributions on benefits and expenses threaten to make the regime even more burdensome for many. The administrative repercussions of a Scottish local income tax might prove to be the last straw.

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