H.M. TREASURY Notes on Clauses

EXPLANATORY NOTE
CLAUSE 22: OPERATIVE DATE OF INDEXATION FOR PAY AS YOU EARN

SUMMARY

1. This clause provides that, to allow employers time to update their payroll systems following a March Budget, no change as a result of the statutory indexation of income tax rate sband limits limits and allowances need be made for the purposes of Pay As You Earn until after 17 May in the relevant year of assessment. It reinstates provisions that were repealed in the 1993 Finance Act.

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DETAILS OF THE CLAUSE

2. Sub-section (2) of this clause inserts sub-section (5A) into section 1 of the Income and Corporation Taxes Act (ICTA) 1988. This provides that no changes resulting from statutory indexation of income tax rate band limits (set out in section 1 of ICTA 1988) need be made for the purposes of Pay As You Earn (PAYE) until after 17 May in the year of assessment. Section 203 of ICTA 1988 is the primary legislation authorising the PAYE regulations.

3. Sub-section (3) of this clause inserts sub-section (2A) into section 257C of ICTA 1988. This provides that no changes resulting from statutory indexation of the personal allowance (at section 257 of ICTA 1988) and the married couple's allowance (at section 257A of ICTA 1988) need be made for the purposes of PAYE until after 17 May in the year of assessment.

4. Sub-section (4) provides that these changes shall have effect for the year 1999-00 and subsequent years of assessment.

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BACKGROUND

5. Unless Parliament decides otherwise, income tax rates band limits and allowances are automatically increased, from the start of each tax year, in line with statutory indexation. If Parliament allows statutory indexation to run, income tax rate bands and allowances are increased in line with the increase in the Retail Prices Index in the year to September 1998.

6. Until the Chancellor makes a his Budget statement, normally in the Budget, it is not certain that employers do not know whether or not the intention will be to increase rate statutory indexation will apply to rate band limits and allowances in line with statutory indexation for the following year of assessment. The two to three weeks between the Budget in March and the start of the new tax year on 6 April do not allow time for employers to update their payroll systems to take account of new rate bands and indexed increases in PAYE codes. Instead, uprated codes are used on the first pay day after 17 May.

7. The delay until after 17 May is an administrative necessity. PAYE automatically refunds any tax overpaid from the start of the year as a result of this delay. This clause will not alter the way in which the Inland Revenue and employers deduct tax through PAYE.