Budget 2014: Tax-free personal allowance to rise to £10,500

The government has announced that no-one will pay any income tax at all from April 2015 – if they earn below £10,500.

In his Budget speech, George Osborne said the rise in the tax-free personal allowance is a "central part of our long term economic plan that people keep more of the money they have earned."

Osborne pointed out that the personal tax allowance was £6,500 when the coalition came to power, and is due to rise to £10,000 at the start of the next tax year on 6 April.

But from 6 April 2015, Osborne said today there will be no income tax at all on the first £10,500 of anyone's salary. He said this will be worth £100 to a typical basic or higher rate taxpayer (£62 in real terms), and will lead to a further 288,000 people no longer paying income tax.

The government said that in total, 25.4 million individuals will benefit from the £10,500 allowance and over 3.2 million people will have been lifted out of income tax altogether by April 2015.

The raised allowance will cost the government £1.4 billion in 2015/16, £1.77 billion the following year, £1.87 billion in 2017/18 and £1.9 billion the year after.

The government also confirmed that the higher rate threshold (at which point people begin paying 40% income tax) will rise from £41,450 to £41,865 next month, and then by a further 1% to £42,285 next year.

"Because I am also passing the full benefit of today's personal allowance increase on to higher rate taxpayers, people earning £42,000, £43, £50, £60, all the way up to £100,000 will be paying less income tax because of this Budget," Osborne added.

Patrick Haines, regional head of advice at Close Brothers Asset Management, said: "Inflationary increases to the personal allowance will help as it continues to rise from £10,000 next tax year to £10,500 in 2015/16, but these measures are small and will hardly impact people's wallets.

What was a surprise in today's Budget was the chancellor's acceptance of the ‘middle-earner squeeze' which has occurred in recent years. He has addressed this by increasing the 40% threshold from the current £41,450 to £41,865 in 2014/15, increasing to £42,285 in 2015/16.

"The numbers may look small but this is certainly a move in the right direction and an acknowledgment from George Osborne that middle-earners have felt disenfranchised in recent years."

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Although you get an extra £500 tax free because of the increased personal allowance the 20% band has narrowed by £80. 42,285-41,865=420