Autumn Statement: Personal tax roundup
Chancellor Philip Hammond’s first Autumn Statement speech included an increase in the income tax threshold and encouragement for the unemployed into work.
There were few surprises in personal tax, apart from a change to pension tax relief, which tax experts said may cause difficulties for people on higher incomes.
The Chancellor increased the threshold for paying income tax from £11,000 now to £11,500 from April 2017 and 12,000 by the end of Parliament (2020). He increased the threshold for higher rate of income tax from £43,001 now to £45,000 in 2017 and £50,000 by 2020, as planned.
Because of increases to the personal allowance announced in Summer Budget 2015 and Budget 2016, a typical basic rate taxpayer will pay £1,005 less income tax in 2017-18 than in 2010-11, the Treasury said in its Autumn Statement published on Wednesday.
This change, together with the changes to the higher rate threshold announced at Budget 2016, means that 31 million people will see their income tax bill reduced in 2017-18 compared to 2015-16, it said.
The Chancellor was keen to show that government was heling people on low and middle incomes – a group nicknamed ‘JAMS’ (just about managing).
The government made tax incentives for the unemployed to find work slightly more generous.
For every £1 someone on Universal Credit earns in work over the work allowance - the amount you can earn without your benefit being affected - Universal Credit will be reduced by 63p instead of the present level of 65p. From April 2017, the taper rate will be reduced to 63%, meaning an extra 2p for every £1 earnt over the work allowance.
Hammond said that the change was in effect a targeted tax cut worth £700m for those in work on low incomes. “It will increase the incentive to work and encourage progression in work,” he said. “And it will help three million households across our country.”
But some tax experts were sceptical. They questioned the Chancellor’s tax priorities and said he could have done more to help people on low income and JAMS.
PwC partner Iain McCluskey said low-paid JAMS will be disappointed that the Chancellor has chosen to continue to cut the tax bills of those earning over £40,000 before helping those earning between £8,500 and £11,000.
“He could have done this by raising the National Insurance primary earnings threshold substantially. Some of our lowest paid workers, such as apprentices, part-time workers and those on zero-hours contracts, will feel they have been dealt a losing hand,” McCluskey said.
When the personal allowance is increased, those on middle and higher incomes generally gain more than those on lower incomes, tax experts said.
The Low Incomes Tax Reform Group (LITRG), part of the Chartered Institute of Taxation, gave an example.
If the personal allowance is increased by £1,000 a basic-rate taxpayer who did not claim means-tested benefits gains £200. A person claiming Universal Credit would gain by only £70 because 65% of their Universal Credit would be clawed back. Still, reductions in marginal deduction rates and increases in the living wage will help the lowest earners, said Robin Williamson, technical director at LITRG.
Gillian Guy, chief executive of Citizens Advice, added: “Reducing the Universal Credit taper rate shows an encouraging change of tack from the government - putting money into welfare instead of taking more out. Helping people on Universal Credit get the most from their earnings is the right intention but it won’t fully offset the cuts to the work allowance.”
The Resolution Foundation think-tank calculated that a couple with two children (main earner working full-time on the national living wage, which will increase to £7.50 per hour for those aged over 25) will be £1,780 worse off overall despite measures announced today boosting their incomes.
The Treasury announced a new savings bond that will give a return of more 2% on savings.
PwC’s McCluskey said that the numerous savings products confuse many taxpayers and the new latest one may be of limited use.
“The new savings bond adds yet another product to the savings options out there for people,” he said. “It may have some limited appeal for those who understand it, but interest rates remaining stubbornly low is the biggest issue for savers.”
The money purchase annual allowance − the amount you can put into a pension without being taxed after you've started taking incomes from it − will be reduced. It will fall from £10,000 now to £4,000 in April 2017.
The Treasury said that earners aged 55 and over should not be able to get double pension tax relief, such as relief on recycled pension savings. But it does want to offer scope for those who have needed to access their savings to subsequently rebuild them. The government will consult on the detail.
Jason Whyte, director in EY’s life and pensions practice, said that UK pension reform started by the previous Chancellor, George Osborne was half-finished.
More still needs to be done to encourage lower earners to save enough for the retirement they expect, he said.
The contribution taper to reduce the tax relief for the highest earners has been “cumbersome”, he added.
Key changes include:
- The tax-free personal allowance will be increased from £11,000 now to £11,500 from April 2017 and 12,000 by the end of Parliament (2020)
- Threshold for higher rate of income tax to rise from £43,001 now to £45,000 in 2017 and £50,000 by 2020, as planned
- Universal Credit taper rate reduced from 65% to 63%
- New savings bond - 2.2% gross interest rate – around two million people expected to use it
- ISA limits – ISA limit will increase from £15,240 to £20,000 in April 2017
- Tax rules for non-domiciled individuals (a UK resident whose permanent home, or domicile, is outside of the UK). From April 2017, non-doms will be deemed UK-domiciled for tax purposes if they have been UK resident for 15 of the past 20 years, or if they were born in the UK with a UK domicile of origin
- Money purchase annual allowance will be reduced to £4,000 from April 2017