Thursday, 19 March 2015


UPDATE 13 MAY 2015
It is likely in view of Conservative election promises that the rises in personal allowance and higher rate threshold will be higher in the earlier years than set out here. See Income tax cuts ahead. That does not affect the overall conclusion.

The biggest income tax cuts from the 2015 Budget will be enjoyed by the better off. Anyone with an income between £43,300 and £120,000 will see a cut of £487 in their income tax in 2017/18 compared with 2014/15 . People with incomes between £11,000 and £41,865 will see a cut of less than half as much - just £200 in 2017/18. And those with an income below £10,000 will see no change as they pay no income tax anyway.

Year by year over the next three tax years 2015/16 to 2017/18 the biggest cut in income tax will be enjoyed by the better off sixth of taxpayers - about 5 million out of around 29 million income tax-payers. Only above £150,000 - the top 1% - do the better off pay more in 2017/18 than in 2014/15 (indicated by a negative cut in the table). Incomes not included in the left hand column will see tax cuts between the amounts in the row above and below.

Income tax cut on previous year
                Tax year 2015/16 2016/17 2017/18 Total cut 2017/18
£10,000 and below £0.00 £0.00 £0.00 £0.00
£11000-£41,865 £120.00 £40.00 £40.00 £200.00
£43,300-£120,000 £224.00 £103.00 £160.00 £487.00
£150,000 plus £16.00 -£23.00 -£80.00 -£87.00

The tax cuts follow from the increases in the personal tax allowance and the threshold at which higher rate tax is paid announced in Budget 2015.

2014/15 2015/16 2016/17 2017/18 Total increase
Personal tax allowance £10,000 £10,600 £10,800 £11,000 £1,000
Higher rate threshold £41,865 £42,335 £42,700 £43,300 £1,435

The Chancellor mentioned this benefit for the better off thus:

"For the first time in 7 years, the threshold at which people pay the higher tax rate will rise not just with inflation – but above inflation."

However, the consequences were not made clear either in the speech or in the detailed notes. The rather different figures there remain a puzzle.

Future rises
The Chancellor also made clear his - and his party's - plans for a personal allowance of £12,500 and a threshold for higher rate tax to begin at £50,000.

"an £11,000 personal allowance. An above inflation increase in the higher rate. A down-payment on our commitment to raise the personal allowance to £12,500 and raise the Higher Rate threshold to £50,000."

If that is done in the next Parliament the Government will need increases in the final three years of £500 a year on the personal allowance and £2233 a year on the higher rate threshold.

Tax threshold changes 2015/16 to 2017/18, projected to 2020/21
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Increase
Personal tax allowance £10,600 £10,800 £11,000 £11,500 £12,000 £12,500 £1,900
Higher rate threshold £42,385 £42,700 £43,300 £45,500 £47,700 £50,000 £7,615

The result will be that basic rate taxpayers with incomes between £12,500 and £42,385 will see a tax cut of £380 in 2020/21 compared with 2015/16. But higher rate taxpayers with incomes of £50,000 to £121,200 will enjoy a tax cut in 2020/21 over 2015/16 of £1903 - five times as big.

Past changes
These plans reverse the trend over the current Coalition government of squeezing higher rate taxpayers - either to deny them any of the tax gain given to basic rate payers or to limit the gain to the same cash amount. The higher rate threshold was cut or frozen for the three years 2011/12 to 2013/14. In 2010/11 the threshold was £43,875, which is higher than it will be in 2017/18.

These calculations only look at income tax not at National Insurance. They exclude the new savings allowance and marriage allowance and do not include the extra personal allowance which some over 67s got in 2014/15 and some over 78s got in 2015/16. After 2016/17 these age allowances will finally disappear.

13 May 2015
vs 1.01