Income Tax Personal Allowance for Those Aged Under 65, Basic Rate Limit and Upper Earnings Limit for 2013-14 Who is likely to be affected? Income tax payers, employers and pension providers. General description of the measure For 2013-14, the measure will increase the personal allowance (currently available to those aged under 65) to £9,205 and reduce the basic rate limit to £32,245. The National Insurance contributions Upper Earnings Limit and Upper Profits Limit will continue to be aligned with the level of the higher rate threshold (the total of the personal allowance and the basic rate limit) by separate regulations. Policy objective The increase to the personal allowance, which from 2013-14 will be available to those born after 5 April 1948. This furthers the Government's stated objective to support those on low and middle incomes and reward work by making the first £10,000 of income free from income tax. The reduction to the basic rate limit is designed so that most higher rate taxpayers will get one quarter of the benefit from the personal allowance that a typical basic rate taxpayer will receive. Background to the measure For 2011-12 the personal allowance was increased by £1,000 to £7,475. For 2012-13, the personal allowance will be increased by £630 to £8,105. The cash increase of £1,100 to £9,205 in 2013-14 is the next step towards the Government's longer-term commitment to increase the personal allowance to £10,000. For 2011-12, the basic rate limit was reduced by £2,400 to £35,000 to target the benefit on basic rate taxpayers. For 2012-13, the basic rate limit will be reduced by £630 so that most higher rate taxpayers receive the same benefit as basic rate taxpayers. For 2013-14, the basic rate limit will be reduced by £2,125 to £32,245. Taken together with the increase to the personal allowance and the reduction to the Upper Earnings Limit and Upper Profits Limit, most higher rate taxpayers will receive one quarter of the benefit that basic rate taxpayers will receive. Detailed proposal Operative date The measure will take effect on and after 6 April 2013. Current law The annual Finance Act provides the charge and main income tax rates (the basic rate, higher rate and additional rate). Section 1 of Finance Act 2011 provides for income tax and sets the main tax rates for 2011-12. Section 2 of Finance Act 2011 sets the basic rate limit at £35,000 for 2011-12. Section 3 of Finance Act 2011 sets the personal allowance for those aged under 65 at £7,475 for 2011-12. The Finance Bill 2012 will set the personal allowance for those aged under 65 at £8,105 and the basic rate limit at £34,370 for 2012-13. Existing legislation requires the Government to increase personal allowances and rate limits (except the £100,000 income limit and the higher rate limit) by the annual percentage increase in the Retail Prices Index to the September preceding the new tax year. This is often referred to as "indexation". The amounts are set by an Indexation Order. The Government made the Order for 2012-13 on 6 December 2011. The legislation to be introduced in Finance Bill 2012 will over-ride the amounts set in the Order for the personal allowance for those aged under 65 and the basic rate limit. Proposed revisions For 2013-14, the personal allowance will be £9,205 and the basic rate limit will be £32,245. The personal allowance will be available to people born after 5 April 1948. These provisions will be included in Finance Bill 2013. Finance Act 2011 and Finance Bills 2012 and 2013 will provide the following amounts: 2011-12 2012-13 2013-14 Personal allowance for those aged under 65 A £7,475 £8,105 £9,205 Basic rate limit £35,000 £34,370 £32,245 Summary of impacts Exchequer 2012-13 2013-14 2014-15 2015-16 2016-17 impact (£m) nil -3,320 -3,450 -3,510 -3,580 These figures are set out in Table 2.1 of Budget 2012 and have been certified by the Office for Budget Responsibility. More detail can be found in the policy costings document published alongside Budget 2012. Economic This measure will reduce income tax for low and middle income impact individuals, improving incentives to enter employment and increasing real household disposable incomes. This might feed through to higher consumption or savings in the household sector. Overall employment outcomes will also depend on other measures announced at Budget relating to personal tax as well as aggregate labour demand and the performance of the wider economy. A Up to and including 2012-13, the amount of an individual's personal allowance depends upon their age and their income in the tax year. From 2013-14, the amount of an individual's personal allowance depends their date of birth and their income in the tax year. Impact on The increase in the personal allowance will remove 840,000 individuals individuals out of income tax altogether in 2013-14. The increase will provide a real and terms gain of £170 to most basic rate taxpayers and £42.50 to most households higher rate taxpayers in 2013-14. 23.6 million individuals will benefit in total. 1.8 million individuals will have an average loss of £185 a year. This includes those with incomes above £118,410, whose personal allowance will be reduced to zero, and therefore will not benefit at all from the increase to the personal allowance (around 520,000 individuals). There will also be other taxpayers with incomes between £41,450 and £118,410 whose tax loss is not offset by the reduction in the NICs Upper Earnings Limit. In addition, 300,000 will be brought into the higher rate of tax. Equalities In 2013-14, women are projected to account for 43 per cent of all impacts taxpayers. As a result of this measure, 45 per cent of the 23.6 million people better off will be women; 59 per cent of the 840,000 individuals taken out of tax will be women; 24 per cent of the 1.76 million individuals worse off will be women. These changes will also have a beneficial impact on people who are entitled to the age-related allowances, but whose incomes reduce their age-related allowance to the amount of the personal allowance, which from 2013-14 will be available to those born after 5 April 1948. In 2013-14, individuals aged 65 and over are projected to account for 17 per cent of all taxpayers. As a result of this measure, 2 per cent of the 23.6 million people better off will be aged 65 and over and 25 per cent of the 1.76 million individuals worse off will be aged 65 and over. Impact on Impacts on administrative and compliance cost for businesses, employers, business pension providers or civil society organisations will be negligible. An including civil individual's personal allowance is reflected in their PAYE tax code. Any society changes to individuals' tax codes are a routine annual event for employers organisations and pension providers. Non-routine changes are handled by HMRC. Operational The impact on HMRC will be negligible because changes to the amounts impact (£m) of personal allowances and rate limits are an annual requirement. (HMRC or other) Other impacts Small firms impact test: This measure will have a minimal impact on small firms. To minimise the impact of the requirements on firms employing up to and including nine employees, there is an HMRC P11 calculator on the business link website. This is provided free of charge and will include the new amounts, which will minimise the burden on employers if they choose to take advantage of it. Small businesses will need to acquaint themselves with the new limits and thresholds. For those businesses that do not have access to computers or payroll software, HMRC will provide manual tables. Monitoring and evaluation A key aim of this policy is to boost the rewards of employment and HMRC and HM Treasury will seek to assess the cumulative labour market effects of increases to the personal allowance in the context of other relevant tax and benefit changes. Further advice If you have any questions about this change, please contact Paul Thomas on 020 7147 2479 (email: firstname.lastname@example.org).
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