Income tax and national insurance allowances and bands
The emergency June Budget announced the following income tax and national insurance changes:
- the income tax personal allowance (ie the tax free band) will be increased by £1,000 to £7,475 for those aged under 65;
- the higher rate income tax threshold will be reduced so that higher rate taxpayers do not benefit from the increase in the personal allowance;
- the employees' national insurance upper earnings limit, at which national insurance rate changes from 11% to 1%, will be reduced to stay in line with the higher rate threshold; and
- the secondary threshold, ie the point at which employers start to pay employers' national insurance contributions, is to be increased by an extra £21 per week above indexation
Who will be affected?
Employers, and basic rate taxpayer employees.
These changes will have effect on and after 6 April 2011.
Pre-election pledges to improve the rewards of work for lower earners by
increasing personal allowances and reversing planned national insurance
increases have survived in the emergency June Budget, in the form of a welcome
£1,000 tax break for those on lower incomes and a small per employee national
insurance saving for employers. We welcome the news that the 880,000 lowest
income taxpayers should be removed from income tax altogether and 23 million
taxpayers should benefit by up to £170 per year.
In these frugal times, the measure is carefully targeted. Higher rate taxpayers will be carved out from these benefits by adjustments to the higher rate income tax threshold.
Alongside major increases in VAT and capital gains tax, these changes represent the partial reinvestment of those additional tax receipts in benefits for lower earners. The Budget document is more ambitious still, setting a long term objective to raise the personal allowance to £10,000 with 'real terms progress towards that goal every year'.
In the context of a complex package of tax increases and rate reductions for companies, these are tools to signal to business that the coalition Government is keen to reinvest in employment, albeit in the current climate it is inevitable that this is only a fairly marginal step towards reducing the cost of hiring and retaining staff.