Millions of workers were promised tax cuts of an average £220 from next spring following the “biggest ever increase in the personal allowance”. However, a drop in the higher rate threshold, above which you pay 40 per cent tax, means anyone earning over £41,450 will see little benefit. It will also have the unwelcome effect of dragging hundreds of thousands more into the higher rate tax net.
The Chancellor announced a widely-trailed increase in the personal allowance – the amount people can earn without paying tax – to £9,205 in April 2013. Mr Osborne said that 24 million people earning less than £100,000 a year will gain from this measure and nearly a million will be taken out of paying income tax altogether.
The Coalition is committed to raising the personal allowance to £10,000 by the end of this Parliament. It is currently £7,475 and will rise to £8,105 on April 6.
But there was a sting in the tail for middle and high earners. To ensure they do not benefit disproportionately the threshold for higher rate tax will also be adjusted. This is currently £35,000 and will fall to £34,370 in two weeks’ time before dropping to £32,245 in April 2013.
Francesca Lagerberg of Grant Thornton, the accountant, said: “Osborne managed to placate his Liberal Democrat colleagues by making another step towards the holy grail of a £10,000 personal allowance by confirming it will rise to £9,205 in April 2013. The good news here is that all taxpayers benefit to some extent and those on lower incomes to the tune of a few hundred pounds each year.
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“Higher tax payers do not receive such a large benefit as the thresholds when higher rates begin to apply are slightly squeezed meaning that most higher rate taxpayers will get one quarter of the benefit a typical basic rate taxpayer will receive.”
Even for lower earners some of the benefit may be clawed back by previously announced changes to the tax credits and benefits system.
Robin Williamson, of the Low Incomes Tax Reform Group, said: “Where households are receiving means tested benefits, the improvement may be far less than expected. And where households have already experienced cuts in tax credits and other welfare benefits, the increase in the personal allowance may do no more than ameliorate their overall loss.”
He explained: “For those receiving means-tested benefits, much of the benefit from the tax cut is clawed back because the less tax you pay, the higher your net income, and the less you are entitled to by way of benefits. So that someone on housing benefit and council tax benefit, for example, will see only 15 per cent of the theoretical increase flow through into their net income.”
There was also disappointment that the Chancellor did nothing to change the complex system by which the personal allowance is gradually withdrawn on higher earnings. Since 2010 personal allowances have been reduced by £1 for every £2 of income above £100,000, falling to zero for people earning more than £112,950. Anyone who falls into this band has a marginal tax rate of 60 per cent.
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Brian Williams at SRLV, the accountants, said “The ‘hidden’ top rate of 60 per cent tax remains in force for a tranche of income just above £100,000, at which point personal allowances are withdrawn.”