Many workers will pay less in tax from next year, Chancellor George Osborne said today.
From April 2014, the Government will raise the amount of income workers under 65 can earn before they pay tax to £10,000 (see MSE's Income Tax Checker for what you pay).
The current personal allowance for under-65s before tax is £8,105, which will rise to £9,440 in April this year.
The result, according to the Government, will see a typical basic rate taxpayer pay £705 less in income tax from April 2014.
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However, the threshold at which people are taxed at 40%, the higher tax rate, will fall overall over this period, cancelling out some of the gain for higher earners.
See our table below for a summary of the new tax thresholds:
|Tax year||Personal allowance for under-65s (you pay no tax on this amount)||Basic rate (20%) - paid on earnings between||Higher rate (40%) - paid on earnings between||Additional rate (i)|
|2012/13||£8,105||£8,105-£42,475||£42,475 to £150,000||Over £150,000|
|2013/14||£9,440||£9,440-£41,450||£41,450 to £150,000||Over £150,000|
|2014/15||£10,000||£10,000-£41,865||£41,865 to £150,000||Over £150,000|
(i) This is 50% in 2012/13, 45% in 2013/14, yet to be announced for 2014/15.
Importantly, if you're employed, don't think the personal allowance means you pay no tax on your first few pay packets during the tax year, until you hit the top of the personal allowance.
Instead, your employer works out what you'll pay in tax over the year, deducting a twelfth of the total each month, so you get the same amount in your pay packet each time.
Different rates apply to over-65s. Those born between 6 April 1938 and 5 April 1948 will keep the same personal allowance of £10,500, while those born before 5 April 1938 will have an allowance of £10,660. These rates are frozen until further notice.
National insurance changes
The Government also announced today it's going to consult on simplifying how the self-employed pay national insurance.
Currently, some self-employed people make Class 2 National Insurance payments in instalments, along with Class 4 payments once a year as part of their self-assessment tax return.
The Government will consult on whether to collect Class 2 payments alongside Class 4 as part of self-assessment.