The New 50 percent Tax on Salary
Originally sent: August 9, 2004Are you familiar with the content of The Income Tax (Pay As You Earn) Regulations 2003? If not, you may have a shock when you open the next communication from Inland Revenue ? it could be a PAYE coding notice which will effectively charge you 50% tax on your salary. Many of your clients could be in a similar position.
Has the Chancellor quietly slipped in an increase in the higher rate of tax while nobody was looking? Adept as he is at increasing taxes while proclaiming to be doing the opposite, he has not actually changed the tax rates at all in the new regulations ? which come into effect from 6th April 2004 but which are already generating coding notices designed to collect substantial additional amounts of tax.
What has changed is that Inland Revenue is now entitled to collect a taxpayer?s entire tax liability through the PAYE system, provided this would not mean more than 50% of the salary was paid away in tax. This includes tax on dividends, rental income, investment returns, and even capital gains tax.
The new regulations require Inland Revenue to take account of both underpayments of tax in previous years, and tax on non-PAYE income during the year, when calculating an employee?s tax code. They do not simply give discretion to do so but seem to insist this happens. The wording in the regulations is ?[when calculating a PAYE code,] Inland Revenue must have regard to ? any other income of the employee which is not PAYE?.
I suspect any of your employed clients who have rental income from buy to let schemes will be in for a big shock when they receive their next coding notices ? if they read them properly and recognise the implications.
There are, however, two important points hidden in the legislation of which you should be aware, and which leave at least a glimmer of hope that yours and your clients? cashflow will not be devastated by this new regulation.
Firstly, the regulations state ?unless the employee objects?. The implication here is that if you do object Inland Revenue will not change the coding to reflect non-PAYE income. Another reading of the Statutory Instrument would be that if the taxpayer objects the Revenue are no longer obliged to reflect that income but may still choose to do so. I think we will only find out which way the Revenue is reading the legislation by making the objection and seeing what happens. Certainly, however, do not simply bow down and accept what you may see as the inevitable. Lodge your objection.
Secondly, the regulations require Inland Revenue to take account of any income tax reliefs for the tax year, provided the taxpayer?s title to those reliefs has already been established. This means you will be able to insist on that film partnership or EIS relief being applied now to your pay code rather than waiting until you submit your self-assessment for the year ? provided, of course, you have the paperwork to prove you are entitled to the relief. Those of us who were relying on the decision in Blackburn v Keeling to process early Schedule D losses against PAYE payments rather than waiting to the end of the year will be relieved that we now seem to have a statutory basis for doing so rather than trying to rely on a case which was lost on appeal.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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