Income tax : increases in the personal allowance since 2010

In May 2010, the new Coalition Government announced that in its first Budget it would introduce a substantial increase in the personal tax allowance, a first step to its longer-term objective to raise the allowance to £10,000.[1] All taxpayers are eligible for this tax-free allowance – which represents the amount of income someone may earn before paying any income tax. The allowance was set at £6,475 for 2010/11. In his Budget speech on 22 June 2010 the then Chancellor, George Osborne, confirmed that it would rise to £7,475 from April 2011, at a cost of £3.5 billion in 2011/12.

At this time Mr Osborne stated that the allowance would continue to rise “during the rest of this Parliament.”[2] In turn, the allowance went up by £630 for 2012/13, by £1,135 for 2013/14, and by £560 to reach £10,000 from April 2014. It is estimated that by 2014/15 these successive increases in the personal allowance resulted in 2.7 million people not having to pay tax on their income, at an annual cost of around £10.7 billion.[3] By comparison the Coalition Government’s decision in its first Budget to increase the standard rate of VAT from 17.5% to 20% was estimated to raise about £13.5 billion in the same year.[4]

Individuals of working age are liable to pay National Insurance contributions (NICs) on their earnings as well as income tax. In the past the point at which individuals start to pay NICs has been aligned with the point at which they start to pay income tax. However, this threshold has not been increased in line with the rise in the personal allowance, so that one section of those individuals ‘lifted out’ of income tax will still be paying NICs.[5]

In the Autumn Statement in December 2014 the Chancellor announced that the personal allowance would rise by £600 to £10,600 for 2015/16. In previous years most, if not all, of the potential benefit for higher rate taxpayers has been ‘clawed back’ by cutting the higher rate threshold – the level above which individuals start to pay the 40% rate on their income.[6] In his 2014 Budget Mr Osborne had proposed that this threshold – the sum of the personal allowance and the basic rate limit – would rise by 1% for 2014/15, and by 1% for 2015/16. Most higher rate taxpayers would receive a tax cut of an equivalent size to that received by basic rate taxpayers.[7] However, in the Autumn Statement the Chancellor announced that the threshold would rise by 1.2% for 2015/16 – in line with inflation – so that the full gains of the last increase in the personal allowance would be passed on to higher rate taxpayers. Overall it was estimated that 3.4m working age individuals would have been taken out of income tax over the Parliament. The tax saving over this period was estimated to be £825 for a typical basic rate taxpayer, and £676 for a typical higher rate taxpayer, in cash terms.[8]

Over this period the Coalition Government’s approach to increasing the personal allowance was generally welcomed, although critics noted that many households benefitting from these tax cuts were adversely affected by other tax changes – such as the increase in the standard rate of VAT – as well as reforms to tax credits and social security benefits.[9] It was also pointed out that for those taken out of income tax, further increases in the allowance were of no benefit, and there was a case to increase the threshold at which individuals started to pay NICs,[10] or, as suggested by the then Labour leader, Ed Miliband, that a 10p starting rate of income tax should be introduced.[11]

The Coalition Government made a second important change to the structure of income tax during its period of office, cutting the additional rate of income tax paid on incomes over £150,000.[12] The Labour Government had introduced the additional rate, set at 50%, from April 2010, estimating this would raise £1.3 billion in 2010/11, rising to £3.05 billion in 2011/12.[13] In his 2011 Budget George Osborne argued that the 50p rate “would do lasting damage to our economy if it were to become permanent” and confirmed that HM Revenue & Customs would review “how much revenue it actually raises.”[14]

In his Budget the next year Mr Osborne announced the additional rate would be cut to 45p from April 2013. HMRC had found evidence of considerable ‘forestalling’ – taxpayers shifting income into the previous tax year to avoid the 50p rate – “at a cost to the taxpayer of £1 billion”, and, in his words, “no Chancellor can justify a tax rate that damages our economy and raises next to nothing.”[15] HMRC’s assessment of the impact of the 50p rate was set out in a detailed report, which estimated that the cost of cutting the rate to 45p would be only £100m by 2014/15, given the anticipated response by taxpayers to the new rate.[16]

In its manifesto for the 2015 General Election the Conservative Party proposed further increases in the personal allowance, as well as the higher rate threshold, so that by the end of the Parliament in 2020/21 they reach £12,500 and £50,000 respectively. The Liberal Democrats also proposed increasing the personal allowance by this amount, but made no commitment to increase the higher rate threshold. By contrast in their manifesto the Labour Party proposed a new 10% starting rate of income tax, and increasing the additional rate to 50%.[17]

The Chancellor George Osborne presented the Conservative Government’s first Budget on 8 July 2015. Mr Osborne confirmed the Government’s plans with regard to the personal allowance and the higher rate threshold, and announced that for 2016/17 the allowance would be set at £11,000, and the higher rate threshold would be £43,000 – the first time that the threshold had been increased by more than inflation alone since 2010.[18] For the following year, the allowance and threshold were increased to £11,500, and £45,000 respectively – another real-terms increase.[19]

Following the 2017 General Election, the Chancellor Philip Hammond presented the Autumn Budget on 22 November. Mr Hammond reiterated the Government’s commitment to increase the allowance and higher rate threshold so that they reached £12,500 and £50,000 by 2020 – though each would be increased in line with inflation only for 2018/19.[20] Mr Hammond presented the Government’s second Autumn Budget on 29 October this year, and announced that both the personal allowance and higher rate threshold would be increased to meet the Government’s manifesto commitment, but from April 2019.[21] This is estimated to cost £2.79 billion in 2019/20, falling to £1.94 billion the following year.[22]

Notes:

[1] HMG, The Coalition: our programme for government, 20 May 2010 p30

[2] Budget 2010, HC 61, June 2010 p40 (Table 2.1 – item 12); HC Deb 22 June 2010 c179

[3] Budget 2013, HC 1033, March 2013 para 1.166-71; Green Budget 2014, Institute for Fiscal Studies, February 2014 p151.

[4] Budget 2010, HC 61 June 2010 (Table 2.1 – item 1).

[5] The Institute for Fiscal Studies estimated that 1.0 million individuals would pay NICs but not income tax in 2013/14 (Green Budget 2013, February 2013 p190)

[6] In 2010/11 the higher rate threshold (HRT) was £43,875: the personal allowance of £6,475, combined with the basic rate limit of £37,400). In 2014/15 the HRT was £41,865. Details of the structure and parameters of income tax in past years are collated on Gov.uk.

[7] HC Deb 19 March 2014 c792

[8] Autumn Statement, Cm 8961, December 2014 para 1.216

[9] For example, see the exchange of views when provision for the allowance in 2011/12 was debated at the Committee stage of the Finance Bill: Public Bill Committee, Second sitting, 10 May 2011 cc50-56.

[10] For example, see “Chapter 7: Policies to help the low paid”, Green Budget 2014, Institute for Fiscal Studies, February 2014

[11] Labour Party press notice, Speech by Ed Miliband : Rebuilding Britain with a One Nation economy, 14 February 2013

[12] This issue is discussed in detail in a second Library briefing paper: Income tax: the additional 50p rate, CBP 249, 26 September 2018.

[13] HC Deb 22 April 2009 c244; Budget 2010, HC 451, March 2010 p140 (Table A11 : item l)S

[14] HC Deb 23 March 2011 c957. See also, HC Deb 14 September 2011 c1191W

[15] HC Deb 21 March 2012 cc805-6

[16] HMRC, The Exchequer effect of the 50 per cent additional rate of income tax, March 2012 pp48-53. The report estimated that the ‘static cost’ of this tax cut, with no allowance for any behavioural response, would be £3.35 billion in 2014/15. See also, Budget 2013, HC 1033, March 2013 p66 (Table 2.2 – item t)

[17] For details see, Taxes and Benefits: The Parties’ Plans, Institute for Fiscal Studies, April 2015

[18] HC Deb 8 July 2015 c336; Summer Budget 2015, HC246, July 2015 paras 1.130-4. The increase in both allowance and threshold was estimated to cost just over £1.1bn in 2016/17 (op.cit. Table 2.1 – items 1,2).

[19] Spring Budget 2017, HC 1025, March 2017 para 3.4. The increase in both allowance and threshold was estimated to cost just over £2bn in 2017/18 (op.cit. Table 2.2 – items x,y).

[20] As a result for 2017/18, the personal allowance was £11,850, and the higher rate threshold was £46,350. HC Deb 22 November 2017 c1053; Autumn Budget 2017, HC587, November 2017 paras 3.4-5

[21] HC Deb 29 October 2018 cc667-8

[22] Budget 2018, HC 1629, October 2018 para 3.7, Table 2.1 – item 10; HMRC, Income Tax: Personal Allowance and basic rate limit from 2019-20, 29 October 2018; PQ186423, 5 November 2018