Budget 2018: personal tax allowance increase brought forward

In a Budget which he described as ‘paving the way for a brighter future’ and with a pledge that ‘austerity is coming to an end’, Chancellor Philip Hammond announced that the government’s commitment to introduce a personal tax allowance of £12,500 and to raise the higher rate threshold to £50,000 would be brought forward by a year, and will now be implemented from April 2019

Hammond said he wanted working people to keep ‘more of the money they earn’.  The current personal allowance, set at £11,850 and the higher rate threshold of £46,350, were scheduled to rise to £12,500 and £50,000 by 2020.

The Chancellor pointed out that this commitment had been made prior to the government’s pledge to provide an additional £20.5bn to the NHS over the next five years.

‘There were suggestions that the least painful way for everyone to contribute to the NHS would be for us to abandon our pledges and freeze the personal allowance at current levels. Be reassured that the idea of ending austerity does not involve increasing tax bills,’ Hammond said.

Instead, in his speech Hammond went on to say that the improvement in public finances, supported by new analysis from the Office for Budget Responsibility, means he will be raising both the personal allowance and the higher rate threshold earlier than planned, before indexing both with inflation in subsequent years.

‘We are delivering on our commitment one year early. This represents a tax cut for 32m people and means an additional £130 in the pay packet of a basic rate taxpayer.  Since 2015 we have taken 1.7m people out of tax altogether and nearly 1m out of higher rate tax,’ Hammond told MPs.

Coupled with changes to the universal credit rules, which he also outlined in the Budget, the Chancellor reported that a single parent receiving universal credit and working 25 hrs week for the national living wage (NLW) would benefit by £890 next year.

From April 2019, the NLW will rise by 4.9% from £7.83 to £8.21.

Changes to the basic rate limit will apply to non-savings and non-dividend income in England, Wales and Northern Ireland and to savings and dividend income in the UK. Since April 2017, the Scottish Parliament sets the basic rate limit and higher rate threshold for non-savings, non-dividend income for Scotland.

According to HMRC’ policy paper, in 2019/20, this measure will benefit 30.6m individuals of whom 26.2m will be basic rate taxpayers and four million are higher rate taxpayers. A basic rate taxpayer will have an average real gain of £66. A higher rate taxpayer will have an average real gain of £387. An additional rate taxpayer will have an average real gain of £236.

The above inflation increase will take 499,000 individuals out of income tax, and 479,000 individuals out of higher rate income tax in 2019/20 compared to previously announced policy.

The analysis also shows 625,000 individuals will have an average real loss of £107 in 2019/20. These losses are mostly the result of increases in the upper profits and upper earnings limits for National Insurance.

Tom Evennett, private client services partner at EY, said: ‘The National Insurance thresholds remains much lower than the personal tax allowance. This means, assuming 2018/19 rates, these individuals [on National Living Wage] would also pay over £750 in National Insurance. Those under 25 on the National Minimum Wage may be outside the income tax net, but even these people find themselves paying National Insurance. A move to align the NI and tax threshold would have a much bigger impact on the really low paid.’

Noting the changes to NI thresholds, Deloitte tax director Patricia Mock said: ‘The rates and thresholds for national insurance will affect these giveaways for those with earned income, as the lower earnings threshold is lower than the personal allowance.

‘This has been increased from £8,424 to £8,632 with the upper earnings threshold being increased to match the higher rate income tax threshold of £50,000.

‘This means a Class 1 National Insurance saving for basic rate taxpayers of £25, and an increase for higher rate and additional rate earners of £340, giving an overall tax and NIC decrease for basic rate employees of £155, higher rate employees of £520 and additional rate employees of £260.’

In 2019/20, the switch will cost the Treasury £2.79bn, and £1.93bn the following tax year.

Policy paper: Income Tax: Personal Allowance and basic rate limit from 2019-20 is here

Report by Pat Sweet

 

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