Nearly one million people will no longer have to pay income tax following an increase to the personal allowance, it was announced by the Chancellor.
Chancellor George Osborne is increasing the threshold at which income tax kicks in by £1,000 to £7,475 from April next year.
The move will save the UK’s 23 million basic rate taxpayers £170 a year, while it will mean around 880,000 people will no longer have to pay the tax at all.
However, higher rate taxpayers will not benefit from the move, and the threshold at which the 40 per cent rate of income tax starts will be frozen until 2013/14.
The increase in the personal allowance is the first step towards fulfilling a coalition pledge to raise the threshold at which income tax starts to £10,000 over the longer term.
It also aims to offset the impact of a 1 per cent rise in National Insurance contributions from April next year for lower earners.
The increase in the personal allowance will cost the Government £3.49bn next year, rising to £3.9bn by 2014/15.
Frank Nash, a senior tax partner at Blick Rothenberg, said: “Pre-Budget reports indicated that this would be funded by cutting the capital gains tax exemption but the announcement today increases the exemption so it is not clear how the personal allowance increase is going to be funded.”
The Low Incomes Tax Reform Group welcomed the increase to the personal allowance, but warned people receiving means-tested benefits would not see the full benefit of the change.
Robin Williamson, the group’s technical director, said: “The reason is that entitlement to means-tested benefits is based on after-tax income.
“Therefore, reducing a claimant’s tax bill will also decrease their benefits entitlement, affecting their overall cash position.
“For some benefits claimants, such as housing benefit or council tax benefit, the £200 saving can be reduced down to less than a £1 a week.
“And of course, for the very poorest who pay no tax, an increase in personal allowances produces no benefit at all.”
