Budget 2012: Personal allowance to reach £9,205 in 2013
The tax-free personal allowance will increase by £630 to £8,105 next month, and then to £9,205 in April 2013, George Osborne has announced in the Budget.
The chancellor has already pledged to raise the allowance - the amount you can receive before paying any tax -to £10,000 by April 2015.
Osborne calculates that next year's increase in personal allowance means working people will be £170 better off each year after inflation, while higher-rate taxpayers will be £42.50 better off.
He estimates that 24 million people earning less than £100,000 a year will gain from this measure, and it will lift two million people on the lowest incomes out of tax altogether.
Tony Bernstein, senior tax partner at accountants HW Fisher & Company, comments that the increase is to be welcomed, but it's not a "game changer" for people on average incomes.
He adds: "This increase will make the headlines but in reality it puts just £18 extra each month into a typical person's pocket."
Karen Barrett, chief executive of financial adviser search engine Unbiased.co.uk, disagrees, commenting that the increase to £9,205 from April 2013 is a "welcome pledge", especially for those on lower incomes.
"While there are already plans to increase this allowance to £10,000 by April 2015, today's announcement will help fast track to the £10,000 goal," she says.
However, the basic rate limit will be reduced, from £34,370 to £32,245 in 2013/14, so most higher-rate taxpayers will only get a quarter of the benefit a typical basic-rate taxpayer will receive.
Meanwhile, in a bid to simplify the tax system for pensioners, the chancellor is scrapping the age-related allowances for anyone reaching the age of 65 on or after 6 April 2013.
Instead, there will be a single personal allowance for all, regardless of age.
"I will freeze the cash value of the allowance for existing pensioners until it aligns with the personal allowance," Osborne says. He maintains that no pensioner will lose "in cash terms", and the move is a "major simplification" of the existing system.
This article was written for our sister website Money Observer
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).