Wednesday 3rd September 2008
by Bob Bardsley
Know Your Money Editor
September could prove more lucrative than usual for 22 million Britons thanks to a one-off tax rebate from the government. The Press Association reports that £60 is to be added to the monthly salary instalment for anyone paid after September 7th as an attempt to make up for the widely criticised abolition of the 10p tax band. Don't worry if you get paid in the first week of the month though - the extra funds should just appear in your account in October instead, if you are among the 22 million due to receive the refund.
But why is the government doing this at all? According to the Press Association, the move stems from the previous decision to abolish the lowest rate of income tax - ten per cent - which was previously charged to those on the lowest annual pay packets. In order to make up for this, the next tax band was adjusted downwards from 22 per cent to account for 20p in every pound earned. Now, however, the government has backtracked after facing claims that this left those between the two bands paying more than had previously been the case.
The 10p tax band
What exactly is a tax band? Well, it determines the amount of tax you are charged on each pound you earn over the course of the year. Generally speaking, the more you earn, the more you are taxed - figures from HM Revenue & Customs explain that individuals earning more than £34,800 in 2008-09 are to be charged 40 per cent on the portion of their income which is above that cut-off point. Below £34,800, the standard 20 per cent rate of income tax applies.
Before 2008, however, there was a low-rate tax band of 10p in every pound. The government decided to get rid of that rate and put in place the 20p tax band - a slight reduction on the previous middle band of 22 per cent. While it all may sound a little complicated, what it effectively means is that anyone who was earning less than the cut-off point for the 22 per cent band is now facing an income tax rate of twice that they were charged before 2008.
What's being done?
The decision to provide a rebate to those affected by the abolition of the 10p tax band is not a new one - chancellor Alistair Darling announced it in parliament back in May. This is the first time that precise details of how the tax is to be refunded have been reported in the nation's media, though. Speaking in parliament in May, the chancellor stated that the average amount by which those affected have lost out is £120 and that he was keen to take action to address this loss without waiting until November, when the pre-Budget report is due.
He also stressed that any changes which were made would take into account the full loss experienced by such individuals since the beginning of the 2008-09 financial year. However, at the same time, he suggested that any tax rebate scheme might prove "complex and expensive to administer". Despite his concerns, it seems that the government has ultimately adopted such an approach to refunding the lost earnings to individuals throughout the UK.
Show me the money!
As explained above, anyone due to be paid in the first week of September will have to be patient, as their rebates will not begin to appear until their October pay cheque. From September 7th, though, the refunds are scheduled to be added automatically to the amount paid to employees across the country. An initial £60 rebate is allocated to September wages - this will be added to the October payment for those who receive their salary in the first week of the month, the Press Association explains.
Following the initial payout, another six £10 sums have been allocated to each individual, accounting for the average loss of £120 per household detailed back in May. Therefore, by the time everybody has been paid in October, they should all have received £70. For those paid in the first week, this is to be awarded in a single payment followed by five more £10 top-ups. For everybody else, it is to be £60 in September and then six months of £10.
Whichever way you look at it and whichever way you receive it, overall each of the 22 million affected employees should receive the full £120 they are estimated to have lost out on over the financial year. Meanwhile, the government is raising the tax-free allowance to £6,035 from September 7th - an increase of £600 - to help offset the impact of the removal of the 10p rate in the months which follow.
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