Easing the squeeze: a tax cut for all?


In the run up to today’s Budget, it has been widely reported that the Chancellor is set to announce a further above-inflation increase in the personal tax allowance – the amount that an individual can earn before becoming liable for income tax – meaning that it will reach the £10,000 target that the Government previously set for the end of the Parliament one year early, in April 2014. The allowance would thus be more than 50 per cent bigger than when the coalition took office[1], and an estimated two million workers will have been taken out of income tax altogether over the period. But, with wage earners unevenly spread across families, just how much do households stand to gain from this latest move?

In the absence of any further announcements, the allowance would be set to reach £9,740 in 2014 [2]. Assuming that the higher rate threshold remains at its previously announced level of £41,865, the additional £260 allowance would therefore be worth £52 a year to all taxpayers earning above the threshold but below the £100,000 limit at which the personal allowance is withdrawn [3]. As the chart below shows, at the household level all parts of the distribution would benefit to some extent, but the largest cash gains would be likely to accrue to those in the richest households – reflecting the higher concentration of qualifying taxpayers in such families. Indeed, of the overall £1 billion plus giveaway, three-quarters is likely to flow to those in the top half of the income distribution.

On average, households in the poorest ten per cent of the distribution, where relatively few people earn above the personal tax allowance would gain just £6 a year. In contrast, those in the richest ten per cent would gain an average of £87 a year. In cash terms then, the gains grow across the range of the income distribution. In proportional terms however, the largest gains fall to those households in income deciles 6-9.

1. The allowance was £6,475 in April 2010.

2. Based on the OBR’s projections for RPI in September 2013 (Fiscal and economic outlook, December 2012).

3. That is, £260 x 20% income tax = £52.