Employers are being urged to warn staff of income tax and national insurance changes at the onset of the new tax year.
From 6 April 2008, there will only be two income tax bands of 40% and 20%, with the latter being reduced from 22%. The 10% starting rate for income tax will be removed. According to Elaine Gibson, senior policy advisor at the Institute of Payroll Professionals (IPP), this will have an impact on lower-paid staff who will now find themselves potentially paying tax at 20%. “Lower-paid people will notice a difference in the amount of tax they pay. This could confuse some employees so it would be best practice for employers to inform staff to counteract enquiries coming through payroll and HR departments,” said Gibson.
As a consequence, employees may be more likely to take up salary sacrifice options on tax-efficient benefits such as childcare vouchers in order to take advantage of savings they can make on tax and NI.
“There might be a slight mark up in interest of salary sacrifice but I wonder how many lower paid workers know about the tax break and the Low Pay Commission prevents staff from sacrificing below minimum wage,” added Gibson.
In addition the upper earnings limit for NI contributions is to be increased by £75 per week above indexation, and then from April 2009 aligned with the higher rate threshold – the point at which taxpayers start to pay the higher rate of income tax.