Changes to income tax and national insurance will be of more benefit to higher earners

A surprise £3bn income tax giveaway worth £860 a year to high earners was the centrepiece of Philip Hammond’s third budget, but tax experts said it would leave low earners with little or no gains.

The chancellor brought forward the Conservatives’ election pledge to increase the basic personal allowance to £12,500 while raising the threshold for the 40% higher-rate tax to £50,000.

The rises in personal allowances – which are the starting points for paying 20% and 40% income tax – translate into significant tax cuts further up the income scale. For someone on £12,500, the increase is worth £130, but for those on £50,000 salaries it is worth £860 a year, although this is reduced to £520 once national insurance is taken into account.

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In his speech, the chancellor focused on the impact of the tax cut on lower-income households. He said: “We want working people to keep more of the money they earn. A tax cut for 32 million people … £130 in the pocket of a typical basic-rate taxpayer, meaning since 2015 we’ve taken 1.7 million out of tax altogether and nearly 1 million out of higher-rate tax.”

But Victoria Todd, of the Low Incomes Tax Reform Group (LITRG), said: “Personal allowance increases are often welcomed as helping those on low incomes. However, such increases do not benefit those on the lowest incomes at all, or benefit them by a lower amount than those with higher incomes.

“Those earning under the current personal allowance of £11,850 will see no gain from this change. Those earning above £11,850 may benefit but it depends on whether they receive tax credits or other means-tested benefits such as universal credit.”

The LITRG suggested that for those earning just above £11,850, the gain would be closer to £48.10 as their universal credit award would be reduced by £81.90.

In the budget documents, the cost of the increase in personal allowances was given as £2.8bn for 2019/20.

Patricia Mock, tax director at accountants Deloitte called the increases in the personal allowance “a welcome boost” but added: “This is a costly move for the chancellor.”

Changes to national insurance will peg back some of the gains for higher earners. Although they will now pay only 20% tax on the segment of their income between £46,350 and £50,000, rather than 40% at present, the sting is that they will also have to pay 12% national insurance on that segment.

Figures from the accountants BDO suggest that once NI changes are included, the £50,000 earner will enjoy a net gain of £520 from this budget. For anyone earning more than £125,000, the benefits of the improved personal allowances will be tapered away so they will see no gain.

At the bottom of the income scale, those on the national living wage will see virtually no benefit, as NI will grab back much of the income tax benefit.

Tom Evennett, a partner at the accountants EY, said: “Despite the increase in the personal allowance to £12,500 from April 2019, the accompanying increase in the national living wage means that those working 35 hours a week on this wage will still be paying nearly £500 a year in income tax.

“The NI thresholds remain much lower than the personal tax allowance. This means, assuming 2018/19 rates, these individuals would also pay over £750 in NI. Those under 25 on the national minimum wage may be outside the income tax net, but even these people find themselves paying NI. A move to align the NI and tax threshold would have a much bigger impact on the really low paid.”

The starting point for national insurance for employees, called the lower earnings limit, will rise from £162 a week to £166 a week. Employees pay 12% NI on all earnings above this figure until they reach the upper earnings limit. This is currently £892 a week (£46,384 annually), and will rise from April next year to £962 a week (£50,024 annually). Above the upper earnings limit, employees have to pay NI at a 2% rate.

Income tax and national insurance changes

Income Annual saving 2019/20 compared to 2018/19

£10,000 £25

£15,000 £155

£30,000 £155

£50,000 £520

£100,000 £520

£160,000 £257.50

Source: BDO