Tax tables and table allowances will no longer be a feature of the PAYE system from April 6th. The full tax credit system will replace the existing tax-free allowance based system.
In the coming weeks, each employee will receive one of two forms instead of the old tax-free allowance form. The main notification is the Notice of Determination of Tax Credits and Standard Rate Cut-Off Point (Form P2).
This will show a breakdown of all tax credits, standard rate cut-off point and amounts allocated to other employments.
Form P2N is the Allocation of Tax Credits and Standard Rate Cut-Off Point. This is generally issued where an individual has more than one job or where a married couple are jointly assessed. This notification shows the amounts allocated to one particular employment only.
Under the tax credit system, tax is calculated at the appropriate rates on gross pay to arrive at a gross tax. Gross tax is then reduced by the tax credits due to arrive at the net payable.
The system is a cumulative one where tax credits or standard rate cut-off points that are not used in one year are carried forward and can be used the following year.
The change is made a little more complex because of another fundamental change in the tax system. The tax year is to be aligned with the calendar year with effect from January 1st, 2002.
The calendar tax year beginning on that date will end on December 31st 2002. This means there has to be a shorter tax year to finish off the April to April system. The next tax year will run from April 6th 2001 to 31st December.
For the short tax year, the individual will pay tax only on their income for that almost nine-month period. In general, all annual credit, bands and exemptions will be adjusted from their full-year value to take account of the short year.
The amounts will be adjusted to 74 per cent of the normal annual amounts. A chart showing the different amounts is available from your local Revenue office in the Budget Summary leaflet.
The single or widowed band will change from £20,000 (€25,400) at 20 per cent for the full year to £14,800 for the short year. The balance is taxed at 42 per cent. A married couple with one spouse working pays 20 per cent up to £29,000 for the full year and £21,460 for the short year.
The standard rate band for a married couple, both with income, will be £29,000 subject to an increase of £11,000. That will be adjusted to £21,460 at 20 per cent for the short year with a maximum increase of £8,140.
The main tax credits are single, widowed, married and one-parent family. There is also a widowed parent's credit, home carer's credit, PAYE credit, mortgage interest and age credit.
Tax relief for medical insurance will be deducted at source from April 6th. This will mean premiums will work out 20 per cent cheaper across the board.
