Wednesday, 29 February 2012

Newsflash: the personal allowance IS £10,000

The coalition is making a big song and dance about the plans to increase the income tax free personal allowance to £10,000 (all figues per annum). The official income-tax free personal allowance was only £6,475 in 2009-10 and it's £7,475 in the current tax year 2011-12, which looks like slow progress.

The truth of the matter is, the effective tax-free personal allowance is already £10,000 and has only increased by £493 in the two years since the coalition took over; the benefit of the higher personal allowance has been more or less wiped out by the total 4% increase in National Insurance and Working Tax Credits withdrawal.

Assuming that you consider National Insurance to be income tax (which I do)* and assuming that you consider Working Tax Credits to be negative income tax (for statisical purposes, they are), then if a single low earner had a gross pay of £9,507 in 2009-10, the total income tax/Employee's NIC/Employer's NIC payable was £1,506; and his Working Tax Credits were also £1,506, net nothing (apart from lots of jobs for bureacrats).

The same calculation using 2011-12 rates show that at gross pay of exactly £10,000, the total tax/NIC payable is £1,242, and the total Working Tax Credits are £1,242.

Given that price inflation was about 9% over the past two years, a 4% increase in the effective tax-free personal allowance means that the real tax-free personal allowance has fallen.

You can look up the rates here and check PAYE calculations here.

Just sayin', is all.

* If you assume that Employer's bear the Employer's NIC, the increase is even less spectacular, and has only gone up from £10,200 to £10,5555 over the two years.


A K Haart said...

So the main beneficiaries are probably pensioners?

Mark Wadsworth said...

AKH, separate topic. The 65-74 personal allowance has gone up from £9,490 to £9,940 over the same two-year period.

Bayard said...

AKH, the main beneficiaries are poor people and those who main income is NI-free, like shareholders and landlords.