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Wednesday, 13 May 2015

INCOME TAX CUTS AHEAD

The 2015 Conservative Manifesto promises that the personal tax allowance will rise from its current £10,600 to £12,500 by 2020/21. And the higher rate tax threshold will increase from £42,385 to £50,000 over the same period. That is a rise equivalent to 3.4% a year every year, way above the forecast levels of CPI inflation which rises from 0.2% in 2015 to 2% in 2019 (Economic and Fiscal Outlook, Office for Budget Responsibility, March 2015 Table 1.1).

If the two levels are raised from their 2015/16 level to the promised amounts in even steps of 3.4% they will rise as shown in the table below.

 Current                   rising in equal steps  Manifesto
   2015/16   2016/17   2017/18   2018/19   2019/20    2020/21
Personal tax allowance £10,600 £10,955 £11,325 £11,700 £12,095 £12,500







Higher rate threshold £42,385 £43,810 £45,280 £46,800 £48,375 £50,000







NB allowances and threshold rounded to nearest £5. For the value of these cuts to taxpayers see Tax Cuts for the Better Off. Broadly they are worth £380 by 2020 to basic rate taxpayers and £1903 to higher rate taxpayers.

These rises are higher for the next two years than those already promised in the March 2015 Budget which put the allowance and the threshold up to £10,800 and £42,700 in 2016/17 and then to £11,000 and £43,300 in 2017/18. So expect a 'I'm being much more generous now I'm freed of the Lib Dem lead weight' in Budget II 2015. The Chancellor may even use it as an excuse to re-affirm that the idea of raising personal allowances was always his and not Danny Alexander's.

Of course the allowance and threshold do not have to change in equal steps. And it is possible that the generosity will be saved until closer to the next election. But the personal allowance is constrained by another promise - it is now linked to the National Minimum Wage.

The Conservative Manifesto promises that will be more than £8 by the end of the decade. So it must be at least £8.01 by no later than October 2020. It also promises that anyone working 30 hours a week on the minimum wage will pay no income tax - in other words will earn no more than the personal tax allowance. So the personal tax allowance and the minimum wage must rise in step.

At the moment someone on National Minimum Wage will earn £10,296 in 2015/16 so the policy is already fulfilled. Under the rises in the table above that would remain true for the whole of this Parliament until 2020/21. If the minimum wage rises in equal steps it would rise by 3.6% a year to reach £8.01 by October 2020 - via £6.94, £7.20, £7.46, and £7.73. Every tax year 30 hours a week on that pay - which changes in October - would be comfortably below a personal tax allowance which rose in steps of 3.4%.

But it does mean that the Chancellor must watch the Low Pay Commission decisions on what the level of minimum wage will be each October. And that may influence his decision on the personal tax allowance which is linked to his decision on the higher rate threshold.

So he may not be a lame duck Chancellor, but he is certainly boxed in by election promises.

13 May 2015
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