Budget 2018: Personal allowance increase arrives one year early

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Philip Hammond supported his much-vaunted pledge that ‘austerity is coming to an end’ by bringing forward the government’s increase to the personal allowance a year earlier than planned.

The Chancellor waited until the end of the speech to unveil his commitment to raise the basic rate tax threshold from £11,850 to £12,500 and the higher rate from £46,350 to £50,000 from April 2019-20. The Budget red book confirmed that the threshold will remain at the same level in 2020-21.

In a move that will likely grab the Tuesday morning headlines, Hammond’s earlier than anticipated announcement means that a typical basic rate taxpayer will pay £130 less tax in 2018-19.

Hammond initially teased reneging on the government’s manifesto commitment to increase the personal allowance. With pledges such as an extra £2.5bn NHS cash injection over the next five years, Hammond said he was urged to freeze the current rates. But improved government finances allowed the Chancellor to cut the tax for 32m taxpayers. 

Pushing the ‘austerity is coming to end’ slogan, Hammond said the increase will take 1.74m people out of income tax since 2015-16, and 1m fewer higher rate taxpayers than in 2015-16.

Commentator's welcome increase

The ACCA’s head of taxation Chas Roy-Chowdhury welcomed the accelerated personal allowance pledge: “Many hard-pressed individuals, who have had little or no pay rises over the last several years. This is the biggest signal the Chancellor could give that austerity is almost over,” he said.

Likewise, IPSE’s chief executive officer Chris Bryce called the measure “a shot in the arm” for the lowest paid self employed:  

“According to IPSE research between nine and 13% of the self-employed are at risk of being vulnerable – with low pay being one of the defining characteristics,” said Bryce “Therefore, increasing the current tax-free threshold from £11,850 to £12,500 as soon as April next year is a major shot in the arm for this group.”

With Brexit around the corner, Grant Thornton's head of tax Jonathan Riley commented that the measure would help the "sluggish wage growth".  He added: "If there is a downturn after Brexit, it might keep the tills ringing and prop up consumer confidence."

During AccountingWEB’s live Budget panel, AccountingWEB contributor Norman Younger speculated whether this measure will help the Conservatives court the “workers at the bottom of the pay ladder”.

However, not all AccountingWEB members were impressed by the Chancellor’s personal allowance unveiling. Peter Jones said: “Personal Allowance increase offset by Auto Enrolment increase? So not much extra in people's pockets.”

Need a handy summary of all the major measures from Budget 2018? Visit our at a glance guide.

About Richard Hattersley

Richard Hattersley

Richard is AccountingWEB's Practice Editor. If you have any comments or suggestions for us get in touch.

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29th Oct 2018 18:55

Meanwhile, the Low Incomes Tax Reform Group believes that the personal allowance does little for those on the lowest income.

Victoria Todd, the head of the LITRG team said: “Those earning under the current personal allowance of £11,850 will see no gain from this change. Those earning above £11,850 may benefit but it depends on whether they receive tax credits or other means-tested benefits such as Universal Credit.

“This is because Universal Credit, like other means tested benefits, is based on net income (after tax and National Insurance have been deducted). As the amount of tax they pay reduces, their Universal Credit award also reduces. They will not see the full tax gain of £130 from the increase in the personal allowance; instead, they will only gain overall by £48.10, as their Universal Credit award will be reduced by £81.90. However, those earning above £11,850 who receive tax credits will benefit from the full £130 because tax credits are based on gross income."

Thanks (2)
to Richard Hattersley
30th Oct 2018 13:13

I know very little about 'Universal Credit' and benefits in general bar from the media hype. To see the working practicalities as highlighted by this example, just rams home the effective indirect taxation to those in most need brought on by the rise in personal allowances from this budget.

To me this is totally unjust and hitting those who can least afford it. The hardnosed out there would argue this would encourage those to work rather than receive benefits. However, there are of course many where this simply isn't an option.

This highlights the fact that those receiving the greatest benefit from this hand out are those with allegedly the broadest of shoulders.

I apologise if this sounds too political as it wasn't meant to be, merely acknowledging this practical application raised by the LITRG.

Many thanks to the LITRG.

Thanks (1)
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By raycad
30th Oct 2018 12:09

Beware the sleight of hand! Simultaneously, the NI upper threshold is being increased to £50,024. This means that all those "tax savings" charts in today's Newspapers are incorrect. These tables (copied from Treasury press releases) are showing £860 pa tax savings for those on £50k pa, i.e assuming a 20% saving on the raised threshold slice. But the actual net savings will be just 12% max, and even that's before taking into account any increased pension contributions which might be payable under auto-enrolment. Let's halve those savings, shall we?

The Chancellor giveth and the Chancellor taketh away!!

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By spm
30th Oct 2018 16:10

Like most other commentators you've forgotten to say that the increase in the 40% tax threshold does not apply in Scotland.

The current RoUK threshold is £46,350 compared to £43,430 in Scotland.

The Scottish Government issues its own budget in December....hope to see coverage of that on accountingweb for your readers north of the border.

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