The Chancellor’s sweeping changes to the personal taxation system are set to cause chaos for directors and employees, tax experts have warned.

They claim changes in the PBR to personal allowances and national insurance could see individuals earning more than £100,000 receive the wrong PAYE codes and therefore pay the wrong tax.

The moves – branded as ‘a precision-guided missile to the heart of the British Economy,’ by Shadow Chancellor George Osborne – were savaged by business campaigners.

When asked if there were plans to challenge the government on the issue, Richard Baron head of taxation at the Institute of Directors said: ‘Absolutely. We will be making a big fuss about this.’

Baron said that the system had been turned on its head by the changes to the personal tax allowances regime for those earning more than £100,000 from 2010/11.

There will now be a tapering effect for every pound earned after this threshold up to £140,000.

‘With the tapering , you can’t actually work out the PAYE code in advance,’ Baron said. ‘Because you will not know the exact amount of income an employee is getting paid, due to factors like pay rises and change of jobs, you cannot know the allowance they are entitled to. It will be impossible. The revenue won’t be able to work it out.

‘They’ll have to guess from the previous year’s figures, which means that people are going to be paying the wrong amount of [income] tax and if they are undercharged they will have to pay more or get a tax rebate [if they are overcharged]. It’s going to be a mess. I don’t know why [Darling] did it.’

Grant Thornton’s senior tax partner Mike Warburton said: ‘The PAYE system is ceasing to be fit for purpose. It is a logistical nightmare. What will happen is it will have to get washed out at the end of the year with the self-assessment system.’

Bob Crawford, convener The Institute of Chartered Accountants of Scotland Tax Committee, said that the moves further complicated the UK’s tax system.

Employer tax experts also seized on problems with the changes to personal allowances. There are fears this could be a precursor to future NICs increases.
‘The employer tends to be a slightly softer target,’ said Matt Ellis, a partner in the global employer services practice of Deloitte.