Millions of taxpayers will be better off, Chancellor George Osborne announced today. Overall, the Government says a typical worker will pay £800 a year less in tax as a result of today's moves. Here's why.
The current personal allowance – the amount you can earn before tax is charged – for under-65s earning less than £100,000 a year is £9,440. This will rise to £10,000 in April this year, as already planned.
But today's announcement raises the threshold further, to £10,500 in April 2015 (see MSE's Income Tax Checker for what you pay).
This means fewer people will be paying tax – the Government says its changes over a number of years will take three million out of tax altogether.
The rise from £10,000 to £10,500 means basic rate (20%) taxpayers pay £100 less per year, assuming no change to their wage. Of course, if their salary rises, so does the amount they pay.
Most higher rate payers win by more
Higher rate taxpayers who earn less than £100,000 per year will see an even bigger benefit.
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They will get the double boon of an increased personal allowance, PLUS less of their income will be charged at 40%.
The latter point is because more of their income will be charged at 20% rather than 40%.
At present, income over £41,450 per year attracts 40% tax. This threshold will rise to £41,865 in April (the difference between the two figures is £415, and this will be charged at 20%, not 40%). It will rise again to £42,285 in 2015 (another £420 at 20%).
Those who earn £100,000 or more start to lose their personal allowance, so they don't benefit in the same way. But they'll still see more of their income charged at 20% rather than 40%.