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Budget: Income tax

More pounds in your pocket as income tax thresholds rise

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The personal income tax allowance is to be further increased over the next two years, in perhaps the least surprising detail of the 2015 Budget.

The allowance – the amount you can earn before paying income tax – is already rising by £600 to £10,600 next month, as announced in last year’s Budget. Now the Chancellor has revealed that it will climb to £10,800 next year and to £11,000 in 2017, in a move that will take up to 600,000 people out of income tax by 2017/18.

It had been expected that any further rise in the personal allowance would be accompanied by changes to the national insurance contributions (NICs) threshold that would have helped low income workers.

That didn’t materialise, however, noted Mike McCusker, tax partner at PwC in Scotland.

“Raising the income tax personal allowance above the expected rate of inflation to £10,800 next year and £11,000 the following year was a well-rehearsed rabbit out the hat and will take even more people out of the income tax,” he said.

“While many will welcome the move, others will be disappointed that the rises in the lower earnings limit for NICs remain stuck in the slow lane, creating further distance between these two key lower limits in the tax system.”

The personal allowance rise does nothing to help low income workers, said Anthony Thomas, chairman of the Low Incomes Tax Reform Group.

“If the personal allowance is already £10,000, and it goes up to £11,000 by 2017/18, those earning under £10,000 a year will gain nothing. That includes all those who have earned the national minimum wage for 30 hours a week over the last year.”

The tax changes unveiled in the Budget also included an increase in the point at which income tax is charged at 40%. The higher rate threshold has been frozen since 2010, but it will rise from £41,865 to £42,385 next month (as set out last year). Now it will rise to £42,700 in 2016/17 and then to £43,300 in 2017/18.

Donald Campbell, tax partner at Deloitte, said: “Whilst basic rate taxpayers will receive an extra £40 in cash terms in 2016/17 (and a further £40 in 2017/18), higher rate taxpayers will benefit even more due to the increases to the basic rate band as well as in the personal allowance,” he said

“Our calculations indicate that higher rate taxpayers will receive an extra £103 in cash terms in 2016/17 and a further £160 in 2017/18.”

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