Increase in personal tax thresholds

Tax returnAn increase in personal thresholds will mean that workers can earn £9,440 a year without paying a penny in income tax.

Chancellor George Osborne told the House of Commons that he was increasing the planned rise in the threshold by £235 to £1,335, putting a total of £267 in tax-payers' pockets from April next year.

Mr Osborne said that the move would mean that people working full time on the minimum wage will have seen their income tax bill cut in half. Some 24 million people will have benefited overall and two million of the lowest earners will have been taken out of tax altogether.

From a position where the threshold stood at £6,745 when they came to power in 2010, the coalition Government was now "within touching distance" of achieving its plan to make the first £10,000 of earnings tax-free by the end of this Parliament.

Jubilant Liberal Democrats pointed out that the increase in thresholds was the flagship promise on the cover of their manifesto for the 2010 election.

A source close to Deputy Prime Minister Nick Clegg said he was "incredibly and rightly proud" to see the progress made in the Autumn Statement and confident that the £10,000 figure would be reached by 2015 - something which can now be done simply by uprating in line with inflation.

But more middle-income earners are set to be dragged into the 40% tax band by the process of "fiscal drag", as Mr Osborne failed to uprate that threshold to match inflation.

A 1% rise in the tax years 2014/15 and 2015/16 means that the level at which people start paying the 40% rate will go up from £41,450 to £41,865 in April 2014 and £42,285 in April 2015.

Mr Osborne said that, because of the increase in the lower threshold, higher-rate taxpayers will be better off overall next year and no worse off in total by 2015.

The effect of fiscal drag will mean that the Treasury takes £1 billion a year more from higher-rate taxpayers, as 400,000 more workers enter the 40% bracket over the course of the Parliament.