New IR powers to force PAYE employees wth other income to pay tax earlier


D

Daytona

"Millions to be hit by another pay-packet tax"

THE Inland Revenue has given itself new powers to charge an effective 50 per
cent rate for those with extra income from buy-to-let, other investments or
freelance work, The Times has learnt. More than three million people could see
their pay packet hit.

Those who have become used to enjoying freelance earnings tax-free for up to 16
months before paying a tax bill are to be targeted in the crackdown. From April,
they can be charged monthly on their entire earnings through pay as you earn
(PAYE). Those on modest salaries could see their bills double overnight.

http://www.timesonline.co.uk/article/0,,2-1013305,00.html
 
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A

Adrian Boliston

"Millions to be hit by another pay-packet tax"

THE Inland Revenue has given itself new powers to charge an effective 50 per
cent rate for those with extra income from buy-to-let, other investments or
freelance work, The Times has learnt. More than three million people could see
their pay packet hit.

Those who have become used to enjoying freelance earnings tax-free for up to 16
months before paying a tax bill are to be targeted in the crackdown. From April,
they can be charged monthly on their entire earnings through pay as you earn
(PAYE). Those on modest salaries could see their bills double overnight.
But this would not *really* increase the actual tax paid, it would only mean
the tax would have to be paid *as it's earnt*.

I can't see any problem with that when most of us have to pay tax as it's
earnt!
 
T

Tim

"Millions to be hit by another pay-packet tax"

THE Inland Revenue has given itself new powers to charge an effective 50 per
cent rate for those with extra income from buy-to-let, other investments or
freelance work...
So ... do the IR expect all people with irregular earnings to notify them
*whenever* they receive *any* income? [Monthly? .. Weekly? .. Daily??!]
Otherwise, how would they know what level to set their PAYE code at?
 
T

Tim

So ... do the IR expect all people with irregular earnings to notify them
*whenever* they receive *any* income? [Monthly? .. Weekly? .. Daily??!]
Otherwise, how would they know what level to set their PAYE code at?
Also :-

What about allowable expenses??
[Where you might have eg one *huge* expense mid-year, and only small expense
amounts at other times. This one big expense may exceed one month's
(/week's) income!]
 
R

Ronald Raygun

Tim said:
So ... do the IR expect all people with irregular earnings to notify them
*whenever* they receive *any* income? [Monthly? .. Weekly? .. Daily??!]
Otherwise, how would they know what level to set their PAYE code at?
Isn't it just a matter of noting the SE profit declared on the most
recent tax return, extrapolating this to the following year, and then
offering to collect the tax via the tax code *instead of* via the
mid-year payment on account?
 
S

Stephen Burke

Daytona said:
THE Inland Revenue has given itself new powers to charge an effective 50 per
cent rate for those with extra income from buy-to-let, other investments or
freelance work, The Times has learnt. More than three million people could see
their pay packet hit.
The Times hasn't learnt that because it isn't true, not that journalists on
even supposedly heavyweight papers seem to let the truth get in the way of a
story these days ...
 
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T

Tim

Tim said:
So ... do the IR expect all people with irregular earnings to notify them
*whenever* they receive *any* income? [Monthly? .. Weekly? .. Daily??!]
Otherwise, how would they know what level to set their PAYE code at?
Isn't it just a matter of noting the SE profit declared on the most
recent tax return, extrapolating this to the following year, and then
offering to collect the tax via the tax code *instead of* via the
mid-year payment on account?
But what if the work is seasonal - so that the tax collected should actually
be lower initially (because less earnt earlier in the year) then higher
later in the year?

What if there is a particular *large* expense early in the tax year which
needs tax relief, and which could even be larger than a single month's
earnings?

....
 
R

Ronald Raygun

Tim said:
But what if the work is seasonal - so that the tax collected should
actually be lower initially (because less earnt earlier in the year) then
higher later in the year?

What if there is a particular *large* expense early in the tax year which
needs tax relief, and which could even be larger than a single month's
earnings?
Then you opt out. This seems a bit of a storm in a teacup. AIUI
this is really meant for people whose main source of income is their
PAYE job and whose SE business is a sideline.
 
T

Tim

Then you opt out.
Will they make this easy? If so, why doesn't *everyone* do it?! :)


This seems a bit of a storm in a teacup. AIUI this is
really meant for people whose main source of income
is their PAYE job and whose SE business is a sideline.
If so, then surely the effect on overall tax rate on the PAYE pay would be
slight? Wouldn't you need to have a fair amount of "sideline" to get the
overall tax rate up to the 50% "limit"??

The example given in the article shows quite the opposite - main source is
non-PAYE :- "For example, someone earning £40,000 a year with annual rental
income of £50,000 would easily exceed the 50 per cent threshold.".
 
R

Ronald Raygun

Tim said:
Will they make this easy? If so, why doesn't *everyone* do it?! :)
It might actually suit many people to spread their tax throughout
the year, rather than having to part with a sizeable lump sum.
If so, then surely the effect on overall tax rate on the PAYE pay would be
slight? Wouldn't you need to have a fair amount of "sideline" to get the
overall tax rate up to the 50% "limit"??

The example given in the article shows quite the opposite - main source is
non-PAYE :- "For example, someone earning £40,000 a year with annual
rental income of £50,000 would easily exceed the 50 per cent threshold.".
The example given in the article is just a journalist's flight of
fancy. We don't have any official announcements yet which would
support their conclusion, do we?
 
A

Andy Lord

In
Ronald Raygun said:
Tim wrote:

The example given in the article is just a journalist's flight of
fancy. We don't have any official announcements yet which would
support their conclusion, do we?
Surely this was announced at the last Budget and contained in the Income Tax
(Pay As You Earn) Regulations 2003?

The article is just based on the Revenue's new power to calculate an
employee's PAYE tax code based on projected earnings not subject to PAYE.
They have to take account of payments on account already made and the
employee can opt out anyway. I don't see the problem.
 
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T

Tim

It might actually suit many people to spread their tax throughout
the year, rather than having to part with a sizeable lump sum.
But the sizeable lump sum would not be due until *after* all the "spread"
tax would have been paid!

So it would be worthwhile opting-out, then paying the "spread" tax to a
savings a/c across the tax year, waiting a bit after the end of the tax
year, then paying the "sizeable lump sum" to the IR (just before the due
date) while pocketing the "sizeable interest" generated within the savings
a/c! :))
 
R

Ronald Raygun

Tim said:
But the sizeable lump sum would not be due until *after* all the "spread"
tax would have been paid!
You mean like buying TV licence stamps? I'm not convinced. See below.
So it would be worthwhile opting-out, then paying the "spread" tax to a
savings a/c across the tax year, waiting a bit after the end of the tax
year, then paying the "sizeable lump sum" to the IR (just before the due
date) while pocketing the "sizeable interest" generated within the savings
a/c! :))
That's all very well in theory, but many people will be tempted to spend
the money rather than have the discipline to let it sit and grow in a
savings account. And don't forget about the sizeable tax being deducted
from the sizeable interest being earned on the sizeable lump sum. :)

To return to your first point, though, at present (assuming a self-employed
financial year ending on 31/3, and also assuming level earnings throughout
the year) tax in respect of profits is due an average of 13 months after
they're earned. That is, in effect, tax on profits from April to
September 2003 is due at the end of July 2004, and tax on profits from
October 2003 to March 2004 is due at the end of January 2005. Profits
from April to September are in hand, on average, at the end of June, and
the July in question is 13 months later.

If tax is instead to be paid via the PAYE code, the earliest deduction
would be made in April 2005 based on information in the tax return sent
in by end January 2005 in respect of the FY 2003/04, and therefore the
deduction would be on the basis of a twelfth of the extrapolated profits
for FY 2004/05. In effect, therefore, your PAYE payslip for April 2005
would show a deduction in respect of tax on SE profits earned during
April 2004, an average of 12.5 months previously. The deductions made
via the April to September 2005 payslips would replace the lump sum
payment due in July 2005.

So yes, you'd be cheated out of a half month's interest on a whole
month's tax. That's hardly sizeable, is it?
 
T

Tim

To return to your first point, though, at present (assuming a self-employed
financial year ending on 31/3, and also assuming level earnings throughout
the year) tax in respect of profits is due an average of 13 months after
they're earned. That is, in effect, tax on profits from April to
September 2003 is due at the end of July 2004, and tax on profits from
October 2003 to March 2004 is due at the end of January 2005.
I don't agree.

Tax in respect of profits from April 2003 to March 2004 is "due" in *three*
parts (as I'm sure you already know): POA in January 2004, POA in July 2004
and a final Balancing Payment (if relevant) in January 2005.
Indeed, if profits remain equal from year to year (and all allowances also
remain equal!) then the tax for April 2003 to March 2004 will be paid in two
equal instalments in January & July 2004 (because the POA will have been
"correct") - *not* in July 2004 & January 2005.

Thus "on average", the tax is paid around *7* months after it is earned
(average of 1 April to 30 September 2003 is 1 July 2003, and average of 1
October 2003 to 31 March 2004 is 31 December 2003 - check the numbers of
days!).

Profits from April to September are in hand,
on average, at the end of June, ...
Agreed.

... and the July in question is 13 months later.
See above - should be January, 7 months later.

If tax is instead to be paid via the PAYE code, the earliest deduction
would be made in April 2005 based on information in the tax return sent
in by end January 2005 in respect of the FY 2003/04, and therefore the
deduction would be on the basis of a twelfth of the extrapolated profits
for FY 2004/05.
Where does TY 2004-05 come into it? Latest reported figures were for TY
2003-04 (reported January 2005), and this will need to be applied to TY
2005-06 (ie when you start in April 2005).

In effect, therefore, your PAYE payslip for April 2005 would
show a deduction in respect of tax on SE profits earned during
April 2004, an average of 12.5 months previously.
Your tax in PAYE payslip for April 2005 will be in respect of April 2005 -
will it not? Just because the figure used is estimated from the pay earned
during April 2003 doesn't matter. Tax is paid basically "on time" (you
might say a half a month "late").

You are paying tax for the *current* year through PAYE - *plus* you will
still be paying the POA for TY 2004-05 in January and July 2005, plus the
Balancing Payment (if any) for TY 2004-05 in January 2006. Again, assuming
pretty-much equal earnings from year to year, the Balancing Payment will be
near-zero.

The deductions made via the April to September 2005
payslips would replace the lump sum payment due in July 2005.
Nope - the PAYE tax payments made April to September 2005, the first half of
TY 2005-06 (average mid-July 2005), would actually replace the lump sum
payment due at the end of *January 2006* (on average 6-and-a-half months
later). With the PAYE tax payments made October 2005 to March 2006 (the
second half of TY 2005-06, average mid-January 2006) replacing the lump sum
payment due at the end of *July 2006* (again on average 6-and-a-half months
later).

So yes, you'd be cheated out of a half month's interest on a whole
month's tax. That's hardly sizeable, is it?
Except that your "half month" should be re-stated as "6-and-a-half months" -
certainly worthwhile!
 
R

Ronald Raygun

Tim said:
I don't agree.

Tax in respect of profits from April 2003 to March 2004 is "due" in
*three* parts (as I'm sure you already know): POA in January 2004, POA in
July 2004 and a final Balancing Payment (if relevant) in January 2005.
Oops, sorry. My mistake.
Thus "on average", the tax is paid around *7* months after it is earned
OK


Where does TY 2004-05 come into it? Latest reported figures were for TY
2003-04 (reported January 2005), and this will need to be applied to TY
2005-06 (ie when you start in April 2005).
As you pointed out, the two POAs during 2005 are due in respect of
profits (which it is estimated will be) earned during the period April
2004 to March 2005. The POAs relate to 2004-05 but are estimated from
information about 2003-04 reported in January 2005. The tax code
allocated on the basis of information supplied in January 2005 would
normally be applied from April 2005, would it not? That suggests
that the extra deduction from the April 2005 pay packet includes tax
on SE/other income relating -in effect- to April 2004.
Your tax in PAYE payslip for April 2005 will be in respect of April 2005 -
will it not?
Of course the principle of PAYE is to collect tax in respect of income
of the current month, but that's for income from employment. Any
additional tax being collected via an adjusted tax code would surely
be based on information reported in the latest tax return, and will
therefore involve a delay just as the POAs do. No?
Nope - the PAYE tax payments made April to September 2005, the first half
of TY 2005-06 (average mid-July 2005), would actually replace the lump sum
payment due at the end of *January 2006* (on average 6-and-a-half months
later). With the PAYE tax payments made October 2005 to March 2006 (the
second half of TY 2005-06, average mid-January 2006) replacing the lump
sum payment due at the end of *July 2006* (again on average 6-and-a-half
months later).
Well, if that's really the case, then it is indeed a disincentive to
opting in. The POA system at least has breathing space built in, to
absorb SE income fluctuations. Without it, there is a potential (and
unacceptable) need to pay tax on profits before the profits are in
hand. On the other hand, the sooner you pay your tax, the less chance
there is of spending it on fripperies and then having no cash left
when the tax is due.

BTL is a case in point, where it makes little sense to tax in this
way because unexpected voids will upset the cashflow and it's plainly
daft to pay tax on rent you haven't received.

That's why I can't see it making sense except to those whose SE
income is a sideline and whose PAYE income is their main source
of income. Any one who's *seriously* self-employed would not be on
PAYE at all, of course, so is out of the picture anyway.

There is some merit to this system, though, and it's probably easier
to pay like this via the pay packet than having to make explicit
6-monthly payments, in much the same way as it's easier to pay
council tax by direct debit. Perhaps what we need is a system where
you are given a tax code as before, but that it's flexible and that
the employee can always instruct the employer to apply a lower code
at a few days' notice, so that you can in effect pay extra tax whenever
you like and at any level you like, but not less than the allocated
code unless you've previously overpaid.
 
A

Andy Lord

Ronald Raygun said:
<snip lots of stuff>

Well, if that's really the case, then it is indeed a disincentive to
opting in.
I think the point is that one has to opt *out*. The tax code adjustment is
to be made automatically based on the last tax return. Because of general
lack of knowledge and inertia many people will just accept the new code.
"Jam today" for the Treasury.

Andy
 
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T

Thom

Ronald said:
The example given in the article is just a journalist's flight of
fancy. We don't have any official announcements yet which would
support their conclusion, do we?
The articles I saw were pretty hopeless - emphasis on the 50% rate (with
the point that no more total tax would be collected buried later in the article).

Thom
 
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J

Jonathan Bryce

Andy said:
I think the point is that one has to opt *out*.
And opting out means ticking a box on the return. Not that difficult.
 

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