UK: Over Half A Million To Be Taken Out Of Tax By 2017/18

Last Updated: 18 March 2015
Article by Patricia Mock

Patricia Mock, tax director, Deloitte, comments on today's Budget announcement around personal and savings rates allowances. 

In summary: 

  • Personal allowance increase to take nearly 600,000 people out of tax by 2017/18
  • Increases in the higher rate threshold to give higher rate tax payers extra £103 in 16/17 and £160 in 17/18
  • Basic rate and higher rate tax payers with savings income will receive tax saving of up to £200

Personal allowances and thresholds
"Whilst the personal allowance for 2015/16 is to increase to £10,600 as trailed in the Autumn Statement, the Chancellor intends to increase these further to £10,800 in 2016/17, and to £11,000 in 2017/18. These increases are consistent with the agreed Conservative and Liberal Democrat policy of increasing the personal allowance to £12,500 by 2020 and will take another 247,000 people out of tax altogether in 2016/17, with another 341,000 to follow in 2017/18.  

"The higher rate threshold will remain at £42,385 in 2015/16 giving a basic rate band of £31,785.  This compares to the 2014/15 higher rate threshold of £41,865 and the basic rate band of £31,785.  However, in 2016/17 and 2017/18 the higher rate threshold will increase, to £42,700 and then £43,300, giving basic rate bands of £31,900 and £32,300 respectively. 

"The overall cost of these increases are predicted to be £960 million in 2016/17 and £1.48 billion in 2017/18.  

"Whilst basic rate taxpayers will receive an extra £40 in cash terms in 2016/17 (and a further £40 in 2017/18), higher rate taxpayers will benefit even more due to the increases to the basic rate band as well as in the personal allowance. Our calculations indicate that higher rate taxpayers will receive an extra £103 in cash terms in 2016/17 and a further £160 in 2017/18.  

"These increases in the basic rate band are the first since 2009, and are a welcome reversal in this area which will hopefully reduce the estimated 18% of taxpayers who are currently higher rate taxpayers – an increase from 10% at the start of the Coalition government. 

"In contrast to recent Budgets, those earning over £121,600 (in 2016/17) or £122,000 (in 2017/18) will also benefit from the changes as despite not receiving a personal allowance, the increases in the basic rate tax band mean that these taxpayers can expect to receive an extra £23 in 2016/17 and a further £80 in 2017/18. 

"The upper earnings limit and upper profits limit for national insurance will be increased in line with the personal allowance.  No changes have been announced to the primary threshold, so the anomaly of low paid employees being taken out of income tax but remaining in national insurance still remains."  

Savings rates and allowance 
"The new Personal Savings Allowance should benefit the majority of savers – indeed the Chancellor stated that this measure would take 95% of savers out of tax on those savings. 

"From April 2016, those with annual taxable income of less than £42,700 will enjoy the new Allowance which exempts the first £1,000 of interest earned in the year from tax. For those earning between £42,701 and the additional rate threshold of £150,000, the new Allowance will be restricted to £500, so that they receive the same maximum £200 saving per year as basic rate taxpayers.  Any interest earned in excess of the £1,000 / £500 Allowances will remain taxable at the marginal rates of 20% and 40% respectively. 

"Additional rate taxpayers earning over £150,000 will not benefit from the Allowance. 

"This announcement builds on the Chancellor's previous Budget in which he undertook to exempt from tax any interest received by a saver whose total taxable income was less than £15,600 (from April 2015) by introducing a savings rate on interest of up to £5000 of 0%. But this rate only affects people on low incomes as non-savings income is taxed as the lowest slice of income and does not attract the 0% band. Hence, only those whose non-savings income is less than £15,600 (in 2015/16) will benefit from this change, whereas the new savings exemption will benefit all those with savings income providing their overall income is less than £150,000. 

"Taken together however from April 2016 those with overall income of less than £16,800 will not have to pay tax on any savings income. 

"From April 2016 it is proposed that the 20% automatic deduction of tax from non-ISA bank interest will be abolished entirely, which is an essential change to ensure that the savings are delivered without the need for repayment claims."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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