Thursday, 6 December 2012

A free iPad mini for everyone!

What would you do with £267? I’m sorry, I’ll re-phrase that – what will you do with £267. Add a couple of quid and you could have an iPad mini.

Imagine, an extra £22.25 per month in your pocket. Perhaps you’ll have an extra night in with a takeaway pizza each month. Or perhaps a night out down the boozer? Or perhaps it’ll just take the pressure off all the bills and expenses of everyday life.

In yesterday’s Autumn Statement, the chancellor announced that the Personal Allowance – the amount you can earn before paying any Income Tax – will increase to £9,440 in the 2013-14 tax year. The effect of this, all things being equal, will be to put £267 back in the pocket of every basic rate taxpayer (e.g. those earning up to £41,450 gross) when compared to this year.

Since 2010, when this government took office, the Personal Allowance has risen from £6,475. Come April, millions will have been taken out of Income Tax altogether and millions more have seen their income tax bills fall by £593 p.a. It may not feel like it, given all the other pressures on finances at present, but this is a real achievement - and a real help, especially at the lower end of the income spectrum where the marginal impact is greater.

And it’s ONLY happened, thanks to Liberal Democrats in government. Raising the allowance to £10,000 was – and is – a key commitment and one we have delivered. How can I be sure it wouldn’t have happened had Labour or Tories been in power alone? Well, I’m glad you asked – it’s time for a history lesson...

Let’s go back to 1992 – Britain was in recession but John Major won the general election to maintain power. What to do? Well, one of the measures taken was a freeze in the Personal Allowance for three financial years, with a small rise in the third financial following the election.

The size of the rise in that third year following the election? £80 – just 2.32%. Bear that figure in mind... By the end of Major’s tenure in office in 1997, the Personal Allowance was £4,045 – a rise of 17.41% on the 1992 level.

But, of course, that was the Conservatives – surely Labour would perform better. After all, the economy had recovered and Britain was headed for (an all too brief) surplus. Surely, the Chancellor could afford a bit of largesse...

Well, let’s apply the same three year analysis – how much did the Personal Allowance grow in the first three years of the Blair government? Well, it rose from £4,045 to £4,385: 8.41%. So yes, much better than the Tories. By 2010, the Allowance had grown to £6,475 – a whopping 60.07% growth. Remember that number too...

Actually, though, it had grown to that level by 2009 – Labour decided to freeze the threshold in 2010. Effectively this meant a real-terms tax increase for every taxpayer. But times were tough again and Britain was in the grip of recession once more.

Following the election in May 2010 the coalition government was formed with the Tories as the senior partner. And they, too, had form in dealing in freezing Personal Allowances...

But, what has happened? Well, the allowance has been raised – not by 2.32%, nor yet 8.41% but by 45.79% so far - three quarters of the level achieved by Labour over 13 years in power. A rise only achieved because of a Lib Dem manifesto commitment and with Lib Dems as part of the coalition.

And here's another thing, for comparison. For someone on a full time contract (39 hours per week) paying National Minimum Wage, the marginal tax rate (e.g. the amount of tax taken in comparison with the gross wage) has fallen from 6.67% in April 1999 at the time it was introduced to 4.96% once the latest changes come into force in April 2013. Put another way - the Full Time NMW has gone up by 71.94% whilst the tax taken, in cash terms, has risen by just 27.86%.

So, if you'll forgive me, I may well bang on about this one for a while yet!


*NB this post does not take into account National Insurance contributions. Whilst this is another form of income tax, payment of it also helps earn entitlements to the State Second Pension and various other benefits. Even allowing for rises in the rate at which this is paid, I’m sure that the overall picture would be similar: this government has lowered the effect of Income Tax for those on low salaries since 2010.

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