Some 32 million Britons are in line for a tax cut of up to £860 each after the Chancellor brought forward a Tory manifesto pledge today.
Philip Hammond dramatically announced that the basic and higher thresholds are to go up faster than expected as he delivered what could be his last pre-Brexit Budget.
From next April, people will be able earn £12,500 a year tax-free, and the 40 per cent rate will not start until they earn more than £50,000.
The move – which had not been slated to happen until 2020 – means basic rate taxpayers will be £130 a year better off.
A far bigger saving will arrive for those earning £50,000, who will keep an extra £860 compared to their current income tax bill.
The amount people can earn free of income tax thanks to the personal allowance has risen sharply since 2010 – from £6,475 to £12,500 next year
Chancellor Philip Hammond raised the amount people can earn tax-free to £12,500 today
In the build-up to the Budget it had been rumoured that Chancellor Philip Hammond would row back on the promise and freeze the rise in the tax thresholds in order to fund extra spending on the NHS.
Yet, in a final announcement in his Budget statement he pulled a rabbit from the hat and said that he would instead deliver the tax cut early – at the start of the next tax year in April 2019.
Mr Hammond said: ‘My idea of ending austerity does not involve increasing people’s tax bills’.
The personal allowance, which represents the amount that people can earn before income tax kicks in, has risen sharply over the past decade.
The move – which had not been slated to happen until 2020 – means basic rate taxpayers will be £130 a year better off
When the Coalition government came to power in 2010, the tax-free allowance stood at £6,475.
How much will you save?
The tax savings come from the ability to earn an extra £650 tax-free and £3,650 at 20% tax rather than 40%.
Here is how people will save depending on earnings:
£10,000 – no tax paid, no change
£12,500 – no tax paid, £130 saved
£25,000 – 20% tax, £130 saved
£35,000 – 20% tax, £130 saved
£50,000 – 20% tax, £860 saved
Above £50,000 – 40% tax, £860 saved
By April this year it had risen to £11,850 and it will hit £12,500 in just six months’ time.
The higher rate tax threshold stood at £43,875 in 2010 and had risen to £46,350 by April 2018.
It will now jump by a sizeable £3,650 to hit £50,000 in April 2019.
However, the Chancellor failed to tackle an anomaly in the tax system that sees those earning more than £100,000 annually pay an effective tax rate of 60 per cent for the next £25,000 chunk of their earnings.
This happens because their personal allowance is removed at a rate of £1 for every £2 extra that they earn, until it hits zero.
When the personal allowance rises to £12,500 this will apply up to £125,000.
The additional rate tax level of 45 per cent will continue to apply from £150,000.
Tim Stovold, head of tax at Kingston Smith said: ‘The early delivery of the manifesto pledge of a personal allowance of £12,500 from April 2019 is a bold step to take lower earners out of tax, but exacerbates the problem of the 60 per cent tax bracket which now exists on earnings between £100,000 and £125,000.’
The level at which 40% higher rate tax kicks will rise to £50,000 next year. It will have gone up from £42,385 in 2015
Income tax: Who pays what?
There were an estimated 30.1million income tax payers in the UK’s adult population of 53.2million, according to an Institute for Fiscal Studies report in November 2016.
It said that about 4.4million of these pay 40 per cent higher rate tax, providing 38.5 per cent of total income tax revenue. Meanwhile, 333,000 taxpayers pay additional rate tax at 45 per cent, providing 28 per cent of total income tax revenue.
This means that about 25,400,000 taxpayers pay basic rate tax but not the higher rates, contributing 33.5 per cent of the total income tax take.
While the income tax cuts will be welcome by many workers, campaigners have pointed out that they do not help the very lowest paid.
Victoria Todd, of the Low Incomes Tax Group, said: ‘Personal allowance increases are often welcomed as helping those on low incomes. However, such increases do not benefit those on the lowest incomes at all, or benefit them by a lower amount than those with higher incomes.
‘Those earning under the current personal allowance of £11,850 will see no gain from this change. Those earning above £11,850 may benefit but it depends on whether they receive tax credits or other means-tested benefits such as Universal Credit.
‘This is because Universal Credit, like other means tested benefits, is based on net income (after tax and National Insurance have been deducted). As the amount of tax they pay reduces, their Universal Credit award also reduces.
‘They will not see the full tax gain of £130 from the increase in the personal allowance; instead, they will only gain overall by £48.10, as their Universal Credit award will be reduced by £81.90. However, those earning above £11,850 who receive tax credits will benefit from the full £130 because tax credits are based on gross income.
‘LITRG has previously commented that a better method of assisting those on the very lowest incomes would be to restore the previously cut work allowances in Universal Credit. We therefore welcome the fact that the work allowance is to be increased by £1,000 per annum from April 2019. Unfortunately, this increase is limited to households with children and people with disabilities, and will not assist all Universal Credit claimants.
‘In addition, the Government could consider increasing the National Insurance primary threshold. This has now lagged behind the personal allowance for a long time. This would allow more people to earn National Insurance credits without actually having to pay National Insurance contributions.’