In a nutshell – the changes to the Personal Allowance, for the majority of taxpayers, mean that we can earn more before having to pay income tax.
When are the changes happening?
As of 6th April 2017, the new Personal Allowance amount will be increased by £500 from the 16/17 tax year, to £11,500. This is how much you can be paid before you are liable for income tax on your earnings. The new tax code will be 1150L for many taxpayers.
This will apply to all taxpayers, removing discrepancies between people with different birth dates.
All pension providers, employers and income tax payers need to be aware of the changes.
Personal Allowance Tax bands
Not only is the Personal Allowance amount going up, but there are also changes to the Basic Rate limit and Higher Rate threshold which come into effect at the same time. The changes are shown in the table below.
Tax Year 2016/2017 2017/2018
Personal Allowance £11,000 £11,500
Basic Rate Limit £32,000 £33,500
Higher Rate Threshold £43,000 £45,000
These changes to the tax bands do not apply in Scotland, where the Scottish government now has the power to set their own income tax brackets and amounts for non-dividend and non-savings income.
The Additional Rate tax band boundaries remain the same.
Why are the government making these changes?
The present government laid out their plan to raise the Personal Allowance to £12,500 and the Higher Rate threshold to £50,000 by the end of this term. The 2017-18 increases are stepping stones towards this end goal.
Impact
It is important to point out that weighing up if you will be better or worse off after these changes come into force must be done on an individual basis. As with anything to do with tax, the details of your personal circumstances will define your status.
You and me – the individual taxpayer
The government predict that overall 28.9million individual taxpayers will benefit from these changes – 24.1million of those being basic rate taxpayers. On average, they estimate that a basic rate taxpayers will gain an annual £56, Higher Rate taxpayer will see £233 more in their accounts and an Additional Rate taxpayer will gain £110. They have also said that 1.6million taxpayers will lose £23 during the 2017-18 tax year, as a direct result of the changes.
Businesses and employers
Employers are used to an annual change in tax codes anyway, so there is no increase in workload to administer the tax changes. HMRC issue tax codes to employers and take care of anything out of the ordinary.
HMRC
The government have determined that the IT changes HMRC will need to make have “negligible costs”; implying that the changes will have a low impact on the department.
Treasury
The changes to the Personal Allowance and income tax rates will see an estimated £2,030million less being collected into the Treasury overall. This is because 359,000 more people will avoid the Higher rate of income tax and 424,000 more employees will not have to pay any income tax at all.
Whilst this is an obvious loss for the government, they hope that incentivising lower-middle income earners in this way will encourage employment and free up some disposable income for savings or just spending.
Check your tax code
At any time of change, it is important to remember that you are ultimately responsible for ensuring that you are paying your full tax liability. This means checking your tax code. If your code is wrong, then your tax bill is wrong. You could owe more than you have been paying, or you could be owed a rebate for overpaid tax by HMRC. The tax office issues your tax code, but you should always check it is correct for your circumstances.
