Budget blog: Personal allowance brings a welcome windfall
31st October 2018
In one of the most surprising announcements in the Budget speech, and contrary to what most commentators anticipated, the Government has not only kept to its manifesto promises of raising the personal allowance to £12,500 and increasing the level at which people pay higher rate tax to £50,000, but have brought this forward by one year.
As such, from April 2019, every taxpayer earning under £100,000 will save £130 in tax by virtue of the increase in the personal allowance. Also, for individuals earning in excess of £50,000 the increase in the higher rate threshold will mean a reduction in tax of £730 per annum.
Furthermore, the fears over a reduction in the pension annual allowance did not materialise, and the dividend tax remains unchanged.
Higher-rate taxpayers hit by National Insurance rise
Individuals set to benefit from an increase to the higher-rate tax threshold in 2019 will only see half of the reduction expected, as a result of a measure not mentioned in the Budget speech.
In the Budget 2018, the Chancellor announced that the higher-rate income tax threshold would increase from £46,350 to £50,000 in 2019/20.
Taxpayers earning between £46,350 and £50,000 will see their income tax rate reduced from 40% to 20%, providing a tax cut.
However, more detailed documentation published after the Budget speech shows the upper profits and upper earnings limit for national insurance contributions (NICs) will increase at the same time.
This means employees who fall within this earnings bracket will see their National Insurance rate rise from 2% to 12%.
In effect, taxpayers benefitting from a 20% reduction to their rate of income tax will see a 10% increase at the same time.
This measure will wipe out half of the gain for higher earners of raising the starting point for higher rate income tax.
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