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Budget 2018: Most to pay less income tax from April

Most people will pay less income tax from next April after the personal allowance and higher rate tax thresholds were both increased in the Budget – but higher earners will see part of the gain cancelled out by stealth rises to national insurance. 

Chancellor Philip Hammond announced in his Budget speech on Monday that income tax changes planned for 2020 will come in a year earlier than planned. But there was no mention of the changes to national insurance thresholds, which were buried in the Budget papers and only emerged the following day. 

Overall the changes should mean an extra £155 a year in your pocket if you earn between £12,500 and £50,000, and an extra £566 if you earn between £50,000 and £100,000 – see a full rundown of how take-home pay is likely to change below. 

For more info on how income tax works, see our Tax Rates 2018/19 guide.

What will happen to my take-home pay?

To figure out how much better off you'll be from April next year, you need to factor in the national insurance, personal allowance and higher rate tax changes.

Don't take the figures below as definitive for you, because in practice tax rules can get very complicated and there are lots of other factors which affect your take-home pay, for example student loan and pension contributions. (It's also worth bearing in mind some details of the changes have yet to be confirmed in Scotland and Wales).

But in brief, here's the likely impact on your annual take-home pay:

  • If you £8,424 or less, you won't see any change.

  • If you earn between £8,424.01 and £8,632, you should be slightly better off, by up to £25.

  • If you earn between £8,632.01 and £46,384, you should be better off by around £25 due to the national insurance changes and £130 a year due to the personal allowance change. So that's £155 a year better off overall.

  • If you earn between £46,384.01 and £50,024, it gets tricky. Taking into account national insurance, personal allowance and higher rate tax changes, you'll be better off overall – but by exactly how much depends on how much you'll earn. The more you earn, the bigger the boost you'll see. 

  • If you earn between £50,024.01 and £100,000, you should pay £294 more in national insurance, but gain £860 due to the personal allowance and higher rate tax changes. So that's £566 a year better off overall. 

  • If you earn between £100,000.01 and £123,700, it's again more complicated, though you'll be better off overall. You should pay £294 more in national insurance, but your gains from the personal allowance changes will be less as the amount of personal allowance you get is gradually reduced for those earning above £100,000.

  • If you earn over £123,700, you won't get any personal allowance, although you should still gain £730 from the change to higher rate tax. As you should pay £294 more in national insurance, your overall gains should be £436.

How is the personal allowance changing?

OK, here comes the geeky bit...

The personal allowance is the amount most people can earn before they have to pay a penny in income tax. Under the changes announced in the Budget, it's set to rise from £11,850 to £12,500 – meaning that anyone who earns between £12,500 and £100,000 a year will be spared paying tax on £650 of earnings. 

At the moment, you would pay 20% tax on this £650 (the difference between £11,850 and £12,500), equalling £130 – but from April next year, you won't. So that's what you're likely to gain – though of course, to work out the overall impact on your take-home pay you need to factor in higher rate threshold and national insurance changes too. 

The personal allowance is reduced for those earning £100,000+ 

For those earning over £100,000, the personal allowance goes down by £1 for every £2 of income above the £100,000 limit.

Those earning £123,700 or above do not get a personal allowance at all. This means they pay tax on all their earnings, and will start paying the higher rate of income tax earlier – currently, this would be on any income over £34,500.

How is the higher rate tax threshold changing?

The higher rate tax threshold is the point at which most people start paying a, well, higher rate of income tax – in England, Wales and Northern Ireland, that's 40% currently.

From April 2019, the higher rate threshold will be raised from £46,350 to £50,000.

This will mean somebody earning between £50,000 and £100,000 will pay £860 less in income tax each year. 

That's because an additional £3,650 of their earnings will be taxed at the basic rate rather than the higher rate – so 20% rather than 40%. This 20% saving on the £3,650 equals an extra £730 – and of course, they'll also get the extra £130 from their higher personal allowance.

However, to work out your overall gain you'll need to factor in national insurance as well...

How is national insurance changing?

If you're over 16 and earn more than £8,424 you must pay national insurance, which qualifies you to receive a state pension as well as some other benefits.

At the moment, the national insurance bands for annual income are as follows:

  • Between £0 and £8,424: You pay no national insurance on this portion of your income. 
  • Between £8,424 and £46,834: You pay 12% national insurance on this portion of your income. 
  • Over £46,834: You pay 2% national insurance on this portion of your income. 

From April 2019, all these thresholds will be raised to: 

  • Between £0 and £8,632: You pay no national insurance on this portion of your income. 
  • Between £8,632 and £50,024: You pay 12% national insurance on this portion of your income. 
  • Over £50,024: You pay 2% national insurance on this portion of your income. 

This means that taxpayers will pay an extra 10% of their earnings between £46,834 and £50,024 on national insurance from April 2019.

So in practice, if someone earns £50,024 they will make no national insurance contributions for the first £8,632 they earn, but pay 12% of their wages between £8,632 and £50,024. So their total national insurance bill will be £4,967 for the tax year, a rise of £294 compared to the current thresholds.

The national insurance threshold change therefore makes a dent in the personal allowance gains announced in yesterday's Budget for higher earners – which makes it all the more surprising that it got no mention in the Chancellor's speech and only a brief mention in the Budget papers.