Personal Income Tax
Tax rates and allowances (Table A)
As announced in the Autumn Statement, the standard personal allowance will increase in April 2014 by £560 to £10,000 in 2014/15 – the fulfilment of a commitment made in the Coalition Agreement at the start of the Parliament, a year early. For a basic rate taxpayer, the reduction in tax is £112.
Attention has been drawn by the press to significant increases in the numbers of taxpayers paying 40% tax. The level of total income at which the higher rate starts will increase in April 2014 from £41,450 to £41,865; however, that represents a reduction in the ‘basic rate band’ which is charged to 20% tax (down from £32,010 to £31,865). This means the full benefit of the £560 increase in the allowance is not felt at 40% by a 40% taxpayer – someone earning up to £100,000 will enjoy a tax reduction of only £195.
Personal allowances continue to be withdrawn for those with incomes above £100,000, producing a marginal tax rate of 60% in the band between £100,000 and £120,000. For those who have no personal allowances (incomes above £120,000), the reduction in the basic rate band represents a small tax increase of £29.
Future allowances and rates
The personal allowance will rise to £10,500 from April 2015. The basic rate band will again narrow slightly from £31,865 to £31,785, so 40% tax will start on a total income of £42,285. The increases in the 40% threshold (1% each year) will continue to draw more people into paying higher rate income tax.
In the Autumn Statement, the Chancellor announced that married couples and registered civil partners will be allowed to transfer up to £1,000 of their personal allowances to their spouse or partner, starting in 2015/16. This will be linked to the personal allowance, so the amount will in the event be £1,050. Transfers can only be made to a basic rate taxpayer, so the maximum saving is £210.
Age-related allowances
As announced in 2012, the higher allowances for those above 65 remain frozen at their 2012/13 levels, and only those who were already 65 by 5 April 2013 are entitled to receive them. When the ordinary personal allowance has reached the same levels, the higher allowances will be abolished. As the rate for those born before 6 April 1948 is £10,500, this will apply in 2015/16; only the higher £10,660 allowance for those born before 6 April 1938 will continue, probably for one more year.
Scottish income tax
Following the Scotland Act 2012, the Scottish Parliament has powers to vary the rate of income tax in Scotland, with greater control over spending the revenue from this differential rate. This is not dependent on the outcome of the independence referendum – it is part of devolution. It is expected that a Scottish rate will be introduced with effect from April 2016. The Budget includes provisions to deal with the interaction of the Scottish rate with the rest of the UK tax system, including tax reliefs which use the basic rate such as Gift Aid and personal pension contributions. These are technical provisions which will need to be examined for their practical effect nearer the time.