The new tax code for 2014/2015 is:
The Income tax personal allowance and basic rate limit for 2014-15 will change for those born after 5 April 1948.
Who will this affect?
Those who pay Income tax through PAYE, their employers and pension providers.
What does this mean for me?
Firstly the good news
You could be £112 better off than the last tax year. This is because the tax free personal allowance has been increased, meaning you won’t have to pay tax on the first £10,000 you earn. As many as 3 million UK tax payers will be taken out of paying income tax altogether. The £10,000 limit was initially scheduled for April 2015 but was brought forward by one year.
The chancellor said: “From 2014, there will be no income tax at all on the first £10,000 of your salary. That’s £700 less in tax for working families than when this government came to office. Almost three million more of the lowest paid will pay no income tax at all. It’s a historic achievement for this government and for hard-working families across the country.”
The bad news
In line with this, the threshold for the basic rate of tax will reduce to £31,865 from £32,010. This means if you earn £41,865 or over, you will start paying income tax at the higher rate of 40% quicker than you would have previously.
Some of the tax giveaway is clearly being clawed back through reducing the limit of the 40% tax base rate. This reduction means that those in the 40% tax bracket have increased from around three million in number to almost four million. The further reduction for the 2014-15 fiscal year is expected to include an extra 400,000 people.
The tax free personal allowance Policy objective
At the start of the Parliament in 2010, the government made a pledge to reward work and help those on low and middle incomes. Making the first £10,000 of income free from income tax was the major step in addressing the issues that people faced in the wake of the financial crisis that began in 2008.
Changing the 2014-15 basic rate is the realisation of a policy set out in the 2012 Autumn Statement that the ‘higher rate threshold’ will increase by 1 per cent for 2014-15.
Background to the tax code changes
Part of the coalition agreement in 2010 was that the government was “to announce in the first Budget a substantial increase in the personal allowance from April 2011”, with, “a longer term policy objective of further increasing the personal allowance to £10,000, making further real terms steps each year towards this objective”.
The personal allowance for income tax increased by £1,000 to £7,475 for fiscal year 2011-12; it increased by a further £630 to £8,105 the following tax year to £9,440 (an increase of £1,335) the year after that. The cash increase of £560 for 2014-15 is the final step in increasing the personal allowance to £10,000.
Basic rate limits were also reduced incrementally over the same period: by £630 to £34,370 for 2012-13 and by a further £2,360 to £32,010 for 2013-14.
‘The higher rate threshold’ – the rate at which earner pay the highest rate of tax (40%) – will increase by 1% each year to £41,865 for 2014-15 and to £42,285 in 2015-16. This is the sum of the personal allowance and the basic rate limit so the threshold is £41,450 (£9,440 plus £32,010) for fiscal year 2013-14. Because the personal allowance for 2014-15 is £10,000, the basic rate limit will be set at £31,865 with the higher rate threshold increasing to £41,865.