Personal Income Tax

Tax rates and allowances (Table A)

As announced in the Autumn Statement, the standard personal allowance will increase in April 2013 by £1,335, to £9,440 in 2013/14 – the largest ever year-on-year increase, taking some 2 million lower-earning people out of income tax altogether. For a basic rate taxpayer, this represents a tax saving of £267 for the year.

The benefit of the increased allowance is offset for anyone with income over £41,450 by a reduction in the higher rate income tax threshold from £34,370 to £32,010. Taxpayers will start to pay 40% tax once total income exceeds £41,450 (£9,440 + £32,010), down by £1,025 from 2012/13 (£8,105 + £34,370). This means that the saving falls to just £62 for taxpayers with income up to £100,000.

Any saving is dwarfed by the tax increase for anyone in a family which is entitled to child benefit. The High Income Child Benefit Charge, which was introduced on 7 January 2013, will claw back the benefit paid to one partner if either of the couple has income over £50,000. The whole benefit will be clawed back from someone whose income exceeds £60,000. In 2013/14, the first full year of the charge, this will represent a maximum tax increase of £1,055 for a couple with one child, and £1,752 if there are two children.

Personal allowances continue to be withdrawn for those with incomes above £100,000, producing a marginal tax rate of 60% in the band between £100,000 and £118,880. For many of these people, the reduction in the 40% threshold produces an overall tax increase: for those who have no personal allowances (incomes above £118,880), this amounts to £472.

The other major change in tax rates was announced last year, and not mentioned again in Mr Osborne’s speech: the reduction in the top rate of tax from 50% to 45% from April 2013 for those with incomes over £150,000. This has been heavily criticised as a tax cut for the very rich while others have to pay; the Chancellor argues that the rich will pay more tax proportionately than they did with the 50% rate, because so many people took steps to avoid it.

Tax Tip

Income £50,000 – £60,000 or £100,000 – £118,880? Consider increasing pension contributions

Future allowances and rates

The personal allowance will rise to £10,000 from April 2014. This objective of the Liberal Democrats was incorporated in the Coalition Agreement as a target to be achieved before the end of the Parliament; it will have been achieved a year early. The level of total income (personal allowance plus basic rate band) at which 40% tax starts is intended to rise by 1% to £41,865 at the same time.

Age-related allowances

As announced last year, the higher allowances for those aged over 65 will be frozen from 6 April 2013 at their 2012/13 levels and only those who are already 65 by that date will be entitled to receive them. When the ordinary personal allowance has reached the same levels (£10,500 for those born before 6 April 1948 and £10,660 for those born before 6 April 1938), the higher allowances will be abolished.

Pensioners will not suffer a reduction in their allowances, but are unlikely to enjoy an increase until 2015 at the earliest (when the £10,000 2014/15 personal allowance may be raised above £10,500).