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Pay Day Misery

The first pay day of the new tax year is likely to produce a nasty shock for most employees: they will find that their net pay has fallen, in some cases substantially. There are two reasons for this: National Insurance contributions and the new Tax Credits régime.

As announced in last year’s Budget, National Insurance contributions rise by one percentage point from 6 April 2003. One per cent does not sound much, but an individual earning £15,000 a year will find that his National Insurance deduction rises by £8.65 a month. The income tax personal allowance has been frozen for 2003/04, so there will be no reduction in PAYE deductions to compensate.

Indeed, a man with children is likely to find that his PAYE deductions will increase, by £10 a week or £44 a month. This is because the Children’s Tax Credit, which was a tax allowance, has been superseded by the Child Tax Credit, which is in all but name a Social Security benefit paid direct to the child’s ‘main carer’, who is usually taken to be the mother.

In some circumstances, the transfer from father’s wage packet to mother’s bank account may be substantially more than £10 a week or £44 a month. This is because, although the Child Tax Credit and the Working Tax Credit have, taken together, replaced Children’s Tax Credit and the Working Families’ Tax Credit (WFTC), it is not simply the case that the Child Tax Credit has replaced the Children’s Tax Credit and the Working Tax Credit has replaced WFTC. In many cases, the money that was previously paid with father’s wages as WFTC will now be paid direct to mother as part of her Child Tax Credit.

An employee who finds that his net pay has fallen substantially is likely, as a first step, to query the position with his employer, so employers need to be able to explain what has happened, at least in broad terms. They may also need to warn employees that the new Tax Credits have to be claimed: by the middle of March less than half the number of people thought to be entitled had submitted a claim form to the Inland Revenue. Claims cannot be backdated for more than three months, so anyone who does not claim by the beginning of July will lose money. A claim form can be obtained by telephoning the Tax Credit Office on 0800 500 222.

A final point for employers is that, because more families will be entitled to the new Tax Credits than were entitled to WFTC, they are likely to receive more requests for documentary ‘proof of earnings’. The Inland Revenue recently repealed its traditional prohibition on the issue of duplicate Forms P60: a duplicate Form P60 may now be given to an employee who has lost the original, providing it is clearly marked ‘Duplicate’.