Higher rate taxpayers will be £340 a year better off after budget changes to income tax, but lower earners will gain just £70 and those on universal credit just 50p a week, as the chancellor rejected accusations that the well-off do not pay enough tax.
The personal allowance – that part of your pay not liable for income tax – will go up to £11,850 from April next year, a £350 increase from the current level. The rise will help Philip Hammond meet the Conservative election pledge to raise the allowance to £12,500 by 2020. In practice, it turns into a £70 saving for a basic rate taxpayer, as it means that £350 more of their income is not liable to 20% income tax.
In his speech, Hammond described the rise in the personal allowance as “making progress towards our manifesto commitments. The typical basic rate taxpayer will be £1,075 a year better off compared to 2010.”
But the Low Incomes Tax Reform Group said that universal credit recipients would barely notice the benefit. “For many, this is a welcome announcement as it will mean they have more cash in their pockets, however it does little to help those on the lowest incomes.”
It said that under the tax credits system, claimants would see the full benefit of the increase in the personal allowance. “However, those with incomes above £11,500 who are receiving universal credit will most likely see a reduction in their benefit. Instead of gaining £70 a year from the increased personal allowance, they will only gain overall by £25.90 as their universal credit will be reduced by £44.10. In other words, they only gain 37% of the benefit of any increase in the personal allowance.”
Higher rate taxpayers will benefit from a £1,350 rise in the point at which 40% tax begins, with the threshold moving up from £45,000 to £46,350. In practice, this works out as a gain of £270 a year, as £1,350 more of someone’s earnings are taxed at 20% rather than 40%. Once added to the £70 from the personal allowance, the total gain is £340 a year.
The benefit of the personal tax allowance is gradually removed on incomes over £100,000, so that the total income tax gainon earnings over £123,700 falls to £200.
Hammond kept the highest rate of tax at 45%, saying in his speech that “the top 1% are paying a larger share of income tax than at any time under the last Labour government.”
National Insurance rates were raised broadly in line with the Consumer Price Index. The starting point for NI, which is levied at a rate of 12%, will increase from £8,164 to £8,424. Patricia Mock of accountants Deloitte said: “Taking account of NICs, a basic rate taxpayer will see an overall reduction of £101 (income tax reduction £70 and NIC reduction £31), and a higher rate taxpayer will see a net reduction of £236 (tax reduction £340 and NIC increase of £104). Those with income over £123,700 will see a net reduction of £96 (tax reduction of £200 and NIC increase of £104)”.
The chancellor also announced a boost to the lower-paid in the form of a 4.4% increase in the national living wage, which will rise from £7.50 to £7.83 an hour from April 2018. Hammond unveiled what he said were the biggest increases in minimum wages for young people in a decade, which will boost the pay of working teenagers by between 15p and 30p an hour.
The national minimum wage is the minimum that almost all workers are entitled to, while the national living wage, introduced in 2016, is higher – workers receive it if they are over 25.
The Treasury said the boost to the national living wage was equivalent to a pay rise of £600 a year for a full-time employee, and added that the Low Pay commission (LPC) estimated the move would benefit more than 2 million workers.
The government said it would also accept all of the LPC’s recommendations on national minimum wage rates. This means that the rate for 21- to 24-year-olds will rise by 4.7%, from £7.05 to £7.38 an hour; the rate for 18- to 20-year-olds will go up by 5.4%, from £5.60 to £5.90 an hour; that for 16- to 17-year-olds will increase by 3.7%, from £4.05 to £4.20 an hour; while the rate for apprentices is going up by 5.7%, from £3.50 to £3.70 per hour.
Hammond said these changes, combined with increases in the personal allowance, meant this government was “delivering for Britain’s workers”, adding that a full-time worker on the national living wage would take home more than £3,800 extra compared with 2010, if personal allowance increases were also taken into account.
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