Budget 2011: Personal allowance to rise to £8,105 within next 12 months
Chancellor George Osborne claims this will result in 23 million people being £42 better off each year.
Speaking today, Osborne revealed that the income tax allowance threshold for under 65s will increase by another £630 by next April on top of the £1,000 rise coming into effect on 6 April this year.
An estimated 23 million working age people earning over £7,865 a year will gain from the personal allowance increase.
It will help offset the increase in national insurance contributions, which will occur in April when this is indexed by the consumer prices index - and the chancellor claims they will still gain on average £42 a year from next April.
This is a further step towards the government's commitment to increase the personal allowance to £10,000, he said.
Osborne added that these measures will also take 1.1 million people out of income tax altogether.
At the same time, there will be a £630 reduction in the basic-rate limit, meaning the higher-rate threshold will remain unchanged.
In addition, Osborne also revealed the government has decided on a "huge change" to the UK's tax system by launching a consultation on whether to merge income tax and national insurance.
However, the chancellor admitted that bringing the two taxes together would take many years.
One to watch, however, might be the top rate of income tax of 50%, which Osborne said he regards as a temporary measure. He added that while now would not be the right time to remove the 50 per cent tax rate, it is "sensible to see how much revenue it actually raises".
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. To qualify for the state pension, individuals need 30 years’ of full NI contributions.