Most UK taxpayers to benefit from tax changes in the Budget

Almost all tax payers in the UK will benefit from the £630 increase in personal allowances announced today (Wednesday March 23) by Chancellor George Osborne in his 2011 Budget.

In his the Chancellor announced an increase in the basic personal income tax allowance for 2012/13 from the 2011/12 rate of £7,475 to £8,105. Higher rate tax payers who pay tax at 40% will also benefit because the higher rate income tax threshold will also increase by £630 taking it to £43,105.

‘While most people will benefit from this increase in personal allowance, those who receive no personal allowance will not. This principally includes non-domiciliaries claiming the remittance basis and anyone whose income exceeds £116,210. The basic rate band will remain £35,000, so there will be no marginal losers around the basic/higher rate band margin,' said Gary Heynes, joint head of Private Client Tax at Baker Tilly.

Statute provides for personal allowances to be increased automatically in line with inflation as measured the preceding September. The inflation figure is usually announced in October and only then is the Treasury able to calculate the precise amount of the increase for the next tax year.

The personal allowance increase of £1,000 for 2011/12 was announced last June as part of a stated aim of increasing the basic allowance to £10,000 by the end of this Parliament but for higher rate taxpayers the allowance was effectively frozen by narrowing the basic rate income tax band.

For 2012/13 the increase in personal allowances will not be accompanied by any restriction on the basic rate band which means that higher rate taxpayers will also benefit from the increase unless their gross income exceeds £100,000.

Personal allowances are withdrawn for those with income of more than £100,000 at a rate of £1 for every £2 above £100,000. Therefore, for 2012/13 when an individual’s income exceeds £116,210 they receive no personal allowance.
  The Chancellor also confirmed that he views the 50% tax rate as temporary. Richard Jordan, Partner for Private Client specialist law firm Thomas Eggar LLP, said this will be widely welcomed.

‘Alistair Darling conceded that no science or calculation had been carried out prior to arbitrarily choosing the figure of 50%. I have regularly said, as have others, that this was the tipping point as the higher end tax payer moved to a mind set where they were working more for the government than for themselves,’ he explained.

‘The government knows that the path to growth is to cut this tax rate down again; it would send a strong message, but politically the environment is not yet right. I suspect that the tax take has fallen and that this is, and always was, a political gesture rather than a sensible economic one,’ he added.

Greg Limb, partner at KPMG, said anyone with income of £42,000 or less will be paying less tax but for higher rate tax payers, however, the picture is much more mixed. ‘Those earning up to £116,210 will be better off once personal allowances go up in 2013, but worse off from now until then.  And 50% taxpayers, those earning £150,000 plus, have only the comfort that the Chancellor confirmed the rate will be only temporary,’ he said.

‘One change that will affect everyone is the linking of personal tax rates and thresholds to CPI rather than RPI from 06 April 2012. This could result in a reduction in the real value of allowances and tax thresholds in the future,’ he added.