Standard Rating 1999/2000

Standard Rating of Allowances & Operation of PAYE for 1999/2000

Background

In recent years a number of tax reliefs, such as mortgage interest relief and medical insurance relief, have been standard rated. As announced by the Minister for Finance in the Budget, for the tax year commencing 6 April 1999 the personal allowances will also be standard rated. Two issues arise as to how the changes will affect:

• Employee.s tax-free allowance certificates
• The operation of PAYE by employers.
• This article covers both issues.

Employees

Standard Rating of Personal Allowances

For the tax year commencing 6 April 1999 the Single and Married Person.s Allowance and the PAYE Allowance will be fully standard rated - this means that relief will be given at the standard rate of tax of 24%.

The Widowed Person’s and the One-Parent Family Allowances will be part standard rated - this means that part of the relief will be given at 24% and part will be given at the employee.s top tax rate (24% or 46%).

Tax-Free Allowance Certificates

Before the start of the tax year, Revenue decide, based on the most up to date information, whether an employee will be liable for tax at the standard rate or at the higher rate for the new tax year.

Where an employee is designated as liable at the standard rate of tax [table A (single/widowed) or R (married couple)], unrestricted relief will be given in the certificate of tax-free allowances, for all allowances. The result is that the full amount of all the allowances will be shown on the certificate and the employee will have the benefit of these allowances at the standard rate.

Where an employee is designated as liable at the higher rate of tax, a table B (single/widowed) or table S (married couple), certificate is issued. Standard rated allowances will appear on these certificates as a figure, which when relief is applied at 46%, will result in the employee getting the benefit of these allowances at the standard rate of tax.

Tax Tables

Allowances and reliefs which are standard rated are not deductible in arriving at taxable income and, as such, cannot be used to reduce gross income for the purposes of determining which tax table should apply.

To ensure that the correct tax is deducted during the tax year and that undercharges do not arise, it is important that employees are on the correct tax table from the commencement of the tax year. The following situations can arise:

• Employee has been designated Table A or R when B or S is appropriate - employee will end up paying more tax at the end of the tax year when he/she moves on to the higher rate.
• Employee has been designated Table B or S when A or B is appropriate - undercharge arises because of the incorrect allocation of a Table Allowance.

The correct tax table should be determined as follows:

• Deduct any non-standard rated allowances from estimated gross income
• Compare the remaining figure with the tax band of ₤14,000 (₤28,000)
• If the remaining figure is less than ₤14,000 (₤28,000) - Table A (R) applies
• If the remaining figure is greater than ₤14,000 (₤28,000) - Table B (S) applies.

Each employee’s tax-free allowance certificate for 1999/2000 will contain a personalised legend which will assist him/her in checking that he/she is on the correct tax table. This legend will appear on each employee.s certificate as follows:

Table A or R Case

“to ensure the correct amount of tax is deducted you must be on the correct tax table. Your gross income has been estimated at “Less than ₤X*.” If this is incorrect you should contact your tax office.”

Chart 1 - Personal Allowances

Personal Allowances		Figure shown on Tax-Free Allowance Certificate
1999/2000		Table A or R (24% Tax Rate)	Table B or S (46% Tax Rate)
Personal Allowance	Amount of Allowance	Figure in Tax-Free Allowances	Figure in Tax-Free Allowances	Calculation
				* Part of Allowance Standard Rated
Single Person	₤4,200	₤4,200	₤2,192	(₤4,200 × 24%) ÷ 46% = ₤2,192
Married Couple	₤8,400	₤8,400	₤4,384	(₤8,400 × 24%) ÷ 46% = ₤4,384
				(₤4,200* × 24%) ÷ 46 % = ₤2,192
Widowed Person	₤4,700	₤4,700	₤2,692	₤ 500 + ₤500
				₤4,700 ₤2,692
PAYE	₤1,000	₤1,000	₤522	(₤1,000 × 24%) ÷ 46% = ₤522
One-Parent Family Allowance
				(₤1,050* × 24%) ÷ 46% = ₤ 548
Widowed Person	₤3,700	₤3,700	₤3,198	₤2,650 + ₤2,650
				₤3,700 ₤3,198
				(₤1,050* × 24%) ÷ 46% = ₤ 548
Other Person	₤4,200	₤4,200	₤3,698	₤3,150 + ₤3,150
				₤4,200 ₤3,698

Chart 2 - Tax Tables, Rates & Bands

TAX TABLE TABLE	TABLE ALLOWANCE	TAX BAND
Single/Widowed
A	Nil	₤14,000@24%
		Balance@46%
B	₤6,696	All@46%
Married
R	Nil	₤28,000@24%
		Balance@46%
S	₤13,392	All@46%
Marginal Relief Cases
Z	Nil	All@40%

Table B or S Case

“to ensure the correct amount of tax is deducted you must be on the correct tax table. Your gross income has been estimated at “Greater than ₤X*.” If this is incorrect you should contact your tax office.”

*₤X is calculated as the standard rate band (₤14,000/₤28,000) plus the non standard rated allowances included in the certificate of tax-free allowances.

Married Couples

The changes in standard rating of allowances and widening of the tax bands may mean that one spouse has a greater allowance and the other spouse has a lesser allowance (1999/2000 as compared with 1998/99).

An example of this would be in a higher rate case where one spouse has all of the allowances and the other has only the PAYE Allowance. For 1998/99 the certificate will show PAYE Allowance ₤800 at Table S.

The same certificate in 1999/2000 will show PAYE Allowance ₤1000 = allowance of ₤522. i.e. (₤1000 @ 24%) ÷ 46%

If a married couple wish to change the way in which the allowances are divided between them they will need to contact their tax office.

Employers

Background

Where an employee.s income can be accurately estimated at the beginning of the tax year the correct tax rate (24% or 46%) can be designated from the outset. Therefore, where an employee is clearly liable at either the 24% or 46% rate there will be no problem. Difficulties can arise where an employee.s income cannot be accurately estimated from the beginning of the tax year or where the employee.s circumstances change during the year.

In these cases, where Table A or R (24%) has been designated the employer will need to know the point at which each employee should move to the higher rate of 46%. For years up to 1998/99 employers have been advised to commence deducting tax at the higher rate when an employee.s taxable pay exceeded the standard rate band i.e. ₤10,000/₤20,000 for 1998/99.

The allowances and reliefs which have been standard rated cannot be used to reduce gross pay for the purposes of determining the employee.s band of taxable income. As these allowances and reliefs will vary in each case the tax office will specify for each employee the point at which he/she should move to the higher rate of tax to ensure that the correct tax is deducted.

Procedures for 1999/2000

For the tax year 1999/2000 the existing cumulative allowance-based, PAYE system and the method of arriving at taxable pay (i.e. gross pay less tax-free allowances) will remain unchanged. The system is being adapted slightly to cater for the standard rating of allowances. The most significant change will be for standard rate employees who pay tax on Table A or R.

From 6 April 1999, in cases where the Tax Table indicated on the certificate is Table A or R, the employer will be advised of the cut-off point at which the employee should start to be taxed at the higher rate of 46%. The Table A and R cut-off point will be an amount calculated as the difference between the standard rate band of ₤14,000 (individual) or ₤28,000 (married couple) and the employee.s standard rated allowances included in the certificate of TFA. This figure will be clearly shown on the certificate (or tax deduction cards, tape/diskette as appropriate) as follows “deduct tax on the first ₤X of taxable pay@ 24% Balance@ 46%”. The ₤X is the cut-off point and taxable pay in excess of this amount is taxed at 46%.

Note:

The cut-off point does not apply to Table B or S employees as the certificate which issues in respect of these employees instructs that tax be deducted at the 46% rate throughout the year.

The example on page 5, opposite, illustrates how this will operate in cases where a Table A or R certificate of Tax-Free Allowances is issued but where the employee becomes liable at the higher rate during the year.

Example

PAYE System		₤	End of year review		₤
Earnings		28,000	Earnings		28,000
Less:			Less non standard rated allces:(b)
Personal Allowance	4,700		Personal Allowance	500
One-parent family allowance	3,700		One-parent family allowance	2,650	3,150
PAYE Allowance	1,000	9,400	Taxable		24,850
Taxable		18,600
Tax @ 24%	(a) 7,750	1,860	Tax @ 24%	14,000	3,360
Tax @ 46%	Balance	4,991	Tax @ 46%	Balance	4,991
Tax deducted		6,851	Gross Tax due		8,351
			Credit standard rated allowances (c)
			Portion of personal allowance	4,200
			Portion of one-parent
			family allowance	1,050
			PAYE Allowance	1,000
			Total credit@ 24%	6,250	1,500
			Net tax due		6,851
			Tax Deducted		6,851
			Balance due		Nil

The figures (a), (b) and (c) above are calculated as follows:

1. The cut-off point is calculated by reducing the amount of the tax band ₤ for ₤ by the amount of standard rated allowances which have been included in the TFA and therefore have been used to reduce taxable income.

   		₤
   Lower rate band applicable (Widow)		14,000
   Standard rated allowances
   Personal allowance	4,200
   One-parent family allowance	1,050
   PAYE allowance	1,000	6,250
   Cut-Off Point		7,750

2. Non standard rated allowances and (c) Standard rated allowances

ALLOWANCE	(b) Portion on which relief is due at marginal rate	(c) Portion on which relief is due at standard rate	TOTAL
Personal Allowance	₤500	₤4,200	₤4,700
One-Parent Family Allowance	₤2,650	₤1,050	₤3,700
PAYE Allowance	-	₤1,000	₤1,000
TOTALS	₤3,150	₤6,250	₤9,400

In the example above if the earnings of ₤28,000 were spread evenly throughout the year the cut-off point of ₤7,750 would be reached in week 22 as follows:

Gross weekly pay	(₤28,000/52)	₤538.46
Weekly tax-free allowance	(₤9,400/52)	₤180.77
Cumulative gross pay to week 21	(₤538.46 × 22)	₤11,846.12
Cumulative tax-free allowances to week 21	(₤180.77 × 22)	₤3,976.94
Cumulative taxable pay		₤7,869.18