Budget Analysis: How will tax changes affect earners in different income brackets?

PUBLISHED: 20:53 29 October 2018 | UPDATED: 06:53 30 October 2018

Steve Dack, of M&A partners

Steve Dack, of M&A partners


The changes announced in the 2018 Budget will have varying effects on the earnings of workers in different income tax bands, writes STEVE DACK, tax director at M+A Partners in Norwich.

The government had previously pledged to raise the personal allowance, the point at which an individual starts to pay income tax, to £12,500 by the 2020/21 tax year. It had also promised to raise the higher rate threshold, after which the 40% higher rate of tax begins, to £50,000.

Before the chancellor stood to make his Budget speech many commentators were predicting a freeze in the personal allowance and the basic rate limit in order to fund the “end of austerity”.

It was therefore a surprise when he announced that the target thresholds would be introduced a year early. This will see the personal allowance increase from £11,850 to £12,500 and the higher rate threshold from £46,350 increased to £50,000 from April 2019, benefitting over 30 million people.

The National Living Wage is also set to increase from April 2019 by 4.9%. For someone over 25, this will see their hourly rate increase from £7.83 to £8.21.

Assuming they work 40 hours per week, these two measures will see their net pay increase by £55.62 per month. In fact the increase is likely to be slightly more than this once the increase in the National Insurance threshold is known.

For an individual earning £25,000, which is around the national average income, the increased personal allowance will benefit them by £10.83 per month from April 2019.

For a number of years, the tax system has been subject to fiscal drag as the basic rate limit was frozen or even reduced, meaning that more people became higher rate taxpayers. Someone earning £50,000 will revert back to being a basic rate taxpayer which, with the increased personal allowance, will save them £71.67 per month.

The good news is set to continue as the personal allowance is set to remain at the same level in 2020/21 but then increase by inflation from 2021/22 to an estimated £13,310 by 2023/24.

By the same year the higher rate threshold is predicted to be £53,410. Although ostensibly a give away, the Treasury’s policy paper suggests that the chancellor is hoping that taxpayers will help the economy by spending the extra money in their paypacket.

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