The income tax threshold will rise by £1,000 in April next year, with the first £7,475 of income being free of tax, Chancellor George Osborne announced today.
The announced increase is less than the coalition government’s initial proposal to raise it to £10,000. However, the chancellor confirmed that the government hoped to raise it to £10,000 in this parliamentary term.
Independent tax expert and lecturer Sam Hart, says: “I wasn't surprised by the personal allowance only going up by £1,000 – it is part of the Lib Dem's ultimate aim to raise it to £10,000, but given the belt tightening going on, I don't think it could be afforded at the moment.”
In his speech, Osborne called for a responsible society that “rewards the efforts of those who choose to work instead of taxing them unfairly”. He also criticised a system that forces thousands of people to give up more of their income in tax, only to try and claim back some of it in benefits.
“The income tax system, and in particular the abolition of the 10% rate of income tax has meant that many people on lower incomes face higher average tax rates.
“I believe it is important to lift people out of the income tax system and allow them to keep more of their hard–earned money,” he added.
According to the emergency Budget, 23 million basic-rate taxpayers will each gain up to £170 a year from this measure, while 880,000 of the lowest income taxpayers will be taken out of tax altogether.
“For an average earner on £25,000 a year it’s equivalent to a cut in the basic rate of income tax from 20% to 18.9%,” says Justin Modray, spokesperson for Candidmoney.com.
“However, the planned 1% increase in class one national insurance contributions from next April will partly undo the benefit, costing an employee earning £25,000 around an extra £50 a year,” he adds.
Osborne conceded that higher-rate taxpayers won’t benefit from the changes, with the higher-rate threshold frozen until 2013–14 but called these measures “unavoidable”.