Budget 2014: personal tax allowance increase on the cards

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Prime Minister David Cameron

Increases to the personal tax allowance (the amount we can earn before we have to start paying tax) have been the most positive news of many recent Budgets. Now George Osborne seems to be thinking it's time for another injection of positivity, because reports indicate that he's set to increase the threshold again.

But why, and what will it mean?


The tax allowance has already seen some startling rises under the coalition - from just under £6,500 in 2010 to £10,000 by 2014.

Signs of a rise

The Liberal Democrats have always been clear that their ambition is for more increases to the allowance - something that has been a policy of theirs since 2010. We reported last month that Nick Clegg was pushing for a rise to £10,500 by April 2015 and £12,500 in the next parliament.

The first clue that another rise in the personal allowance had become a coalition policy came last week, when Osborne was questioned by MPs at the 1922 Committee as to whether he was going to raise the higher-rate tax threshold at which tax is payable at 40%. He responded by saying that his priority was increasing the tax-free allowance.

The Guardian says that another clear indication of this change will come when David Cameron makes a speech in the West Midlands, and attempts to paint this as a Conservative success.

The BBC says he will add: "It's not just what we are doing that matters; it's why. It's all about values. And the most important value right now - after a difficult time for our country - is giving people a sense of economic security and peace of mind."

The speech won't contain any spoilers - so won't specifically state that the personal allowance is going to be raised. However commentators are speculating that Osborne could announce an increase to £10,500 or £10,750 in April next year.

Why?

The political benefit of changing this allowance is that it benefits the vast majority of earners. For the Conservatives it has the added benefit of flying in the face of their Nasty Party image by being a boon for those on lower incomes.

The timing of another rise would also be significant. At the moment a rise to £10,000 is slated for April 2014, so the next stage is likely come into effect in April 2015 - this would be a month before a general election - which would be a handy time to demonstrate to the electorate that you are making them better off.

What will it mean?

The effect this will have will depend on your personal situation. In his last Budget Osborne announced that by the time the allowance hits £10,000 this April, the average family will be paying £700 less in tax as a direct consequence of the raising of the allowance. A further increase will bump this up still further.

However, it doesn't automatically mean that everyone is better off overall. Those on middle incomes - below the higher rate tax threshold and above the level at which they are entitled to many benefits - will be better off.

However, higher earners are hit with higher taxes. Osborne has simultaneously brought the threshold for paying higher rate tax at 40% down - from £32,010 to £31,865. Coupled with years of failing to keep pace with wage inflation, more people are being drawn into this band. When Osborne took office 3 million people were paying tax at this level: now more than 4 million are.

Meanwhile very low earners are unlikely to be fundamentally better off, because of the changes to benefits that have been taking place alongside the tax changes. Calculations that the government put out after the last Budget showed that the bottom 10% of households are worse off financially overall.

But what do you think? is this rise a good idea? will it leave you any better off?