Income Tax: Personal Allowance and basic rate limit from 2019-20
Published 29 October 2018
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Who is likely to be affected
Income Tax payers, employers and pension providers.
General description of the measure
This measure increases the Personal Allowance to £12,500 for 2019 to 2020. The basic rate limit will be increased to £37,500 for 2019 to 2020. As a result, the higher rate threshold will be £50,000 in 2019 to 2020.
This measure will set the Personal Allowance at £12,500, and the basic rate limit at £37,500 for 2020 to 2021. The higher rate threshold will be £50,000 in 2020 to 2021.
From 2021 to 2022 onwards, the Personal Allowance and basic rate limit will be indexed with the Consumer Price Index (CPI).
Changes to the basic rate limit, and higher rate threshold, will apply to non-savings, non-dividend income in England, Wales and Northern Ireland, and to savings and dividend income in the UK.
Policy objective
This policy ensures the government’s commitment to raise the Personal Allowance to £12,500, and the higher rate threshold to £50,000 is fulfilled a year early.
Background to the measure
The government has an objective to raise the Personal Allowance to £12,500, and the higher rate threshold to £50,000 by 2020 to 2021.
This measure will increase the Personal Allowance for 2019 to 2020 to £12,500, and the basic rate limit will be increased to £37,500 for 2019 to 2020. As a result, the higher rate threshold will be £50,000 in 2019 to 2020. This meets the government’s objective one year early.
Changes to the basic rate limit will apply to non-savings and non-dividend income in England, Wales and Northern Ireland and to savings and dividend income in the UK. Since April 2017, the Scottish Parliament sets the basic rate limit and higher rate threshold for non-savings, non-dividend income for Scotland.
Detailed proposal
Operative date
The measure will have effect on and after 6 April 2019.
Current law
Increases to the Personal Allowance and basic rate limit are indexed with CPI.
Proposed revisions
Legislation will be introduced in Finance Bill 2018-19 to set the Personal Allowance for 2019 to 2020 at £12,500, and the basic rate limit for 2019 to 2020 at £37,500.
These thresholds will remain set at £12,500 and £37,500 for 2020 to 2021 and will be increased in line with CPI thereafter.
The table below sets out the thresholds to include the changes from this measure. Thresholds from 2021 to 2022 onwards have been forecast in line with the Office for Budget Responsibility’s Budget 2018 forecasts of CPI inflation and will be subject to change.
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | |
|---|---|---|---|---|---|---|
| Personal Allowance (PA) | £11,850 | £12,500 | £12,500 | £12,760 | £13,030 | £13,310 |
| Basic Rate Limit (BRL) | £34,500 | £37,500 | £37,500 | £38,300 | £39,200 | £40,100 |
The National Insurance contributions Upper Profits and Upper Earnings Limits are aligned to the higher rate threshold and will therefore also increase in 2019 to 2020.
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| - | -2,790 | -1,935 | -1,445 | -1,605 | -1,780 |
The figures for these measures are set out in Table 2.1 of Budget 2018 as ‘Personal Allowance and Higher Rate Threshold: increase to £12,500 and £50,000 in 2019-20 and 2020-21’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.
Economic impact
This measure will reduce Income Tax for 30.6 million Income Tax payers in 2019 to 2020 (30.7 million in 2020 to 2021), including low and middle income individuals, improving incentives to enter employment and increasing real household disposable incomes. This might feed through to higher consumption or savings in the household sector. Overall employment outcomes will also depend upon other measures announced as well as aggregate labour demand and the performance of the wider economy.
Impact on individuals, households and families
The impact analysis that follows relates specifically to the impact of the legislative provisions outlined above. Gains and losses are presented compared to the Income Tax and National Insurance contributions individuals would have faced if these thresholds were indexed with inflation from 2019 to 2020 onwards.
2019 to 2020 impacts
In 2019 to 2020, this measure will benefit 30.6 million individuals of whom 26.2 million will be basic rate taxpayers and 4 million are higher rate taxpayers. A basic rate taxpayer will have an average real gain of £66. A higher rate taxpayer will have an average real gain of £387. An additional rate taxpayer will have an average real gain of £236.
The above inflation increase will take 499,000 individuals out of Income Tax, and 479,000 individuals out of higher rate Income Tax in 2019 to 2020 compared to previously announced policy.
625,000 individuals will have an average real loss of £107 in 2019 to 2020. These losses are mostly the result of increases in the Upper Profits and Upper Earnings Limits for National Insurance.
Cumulative changes to the Personal Allowance and higher rate threshold between 2015 to 2016 and 2019 to 2020 mean a typical basic rate taxpayer will have an overall cash gain of £380 and a real terms gain of £236. A typical higher rate taxpayer will have an overall cash gain of £1,142 and a real terms gain of £694.
Cumulative changes to the Personal Allowance and higher rate threshold since 2010 to 2011 mean a typical basic rate taxpayer will have an overall cash gain of £1,205 in 2019 to 2020. A typical higher rate taxpayer will have an overall cash gain £1,818 in 2019 to 2020.
2020 to 2021 impacts
In 2020 to 2021, this measure will benefit 30.7 million individuals, of whom 26.1 million will be basic rate taxpayers and 4.1 million higher rate taxpayers. A basic rate taxpayer will have an average gain of £20. A higher rate taxpayer will have an average real gain of £228. An additional rate taxpayer will have an average real gain of £169.
148,000 fewer individuals are expected to pay Income Tax, and 314,000 fewer are expected to pay higher rate Income Tax, in 2020 to 2021 compared to previously announced policy.
901,000 individuals will have an average real loss of £64 in 2020 to 2021. These losses are mostly the result of increases in the Upper Profits and Upper Earnings Limits for National Insurance.
Cumulative changes to the Personal Allowance and higher rate threshold between 2015 to 2016 and 2020 to 2021 mean a typical basic rate taxpayer will have an overall cash gain of £380 and a real terms gain of £190. A typical higher rate taxpayer will have an overall cash gain of £1,142 and a real terms gain of £555.
Cumulative changes to the Personal Allowance and higher rate threshold since 2010 to 2011 mean a typical basic rate taxpayer will have an overall cash gain of £1,205 in 2020 to 2021. A typical higher rate taxpayer will have an overall cash gain £1,818 in 2020 to 2021.
All taxpayers with income of £125,000 or above in both years have their Personal Allowance tapered to zero. Therefore they derive no benefit from the Personal Allowance increase.
Actual gains for individual taxpayers will vary according to individual circumstances.
This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
Income Tax changes apply regardless of personal circumstances or protected characteristics such as gender, race or disability. Equalities impacts will reflect the composition of the Income Tax paying population.
From this measure, 2019 to 2020 estimated impacts by gender are:
- 30.6 million individuals will benefit - of these, 17.8 million (58%) are male and 12.8 million (42%) are female
- 499,000 individuals will be taken out of tax - of these, 219,000 (44%) are male and 280,000 (56%) are female
- 479,000 individuals will be taken out of the higher rate of tax - of these, 333,000 (70%) are male and 145,000 (30%) are female
- 625,000 individuals lose, of which 393,000 (63%) are male and 233,000 (37%) are female
From this measure, 2019 to 2020 estimated impacts by age are:
- 30.6 million individuals will benefit - of these, 24.5 million (80%) are below State Pension age and 6.0 million (20%) are above State Pension age
- 499,000 individuals will be taken out of tax - of these, 331,000 (66%) are below State Pension age and 168,000 (34%) are above State Pension age
- 479,000 individuals will be taken out of the higher rate of tax - of these, 420,000 (88%) are below State Pension age and 58,900 (12%) are above State Pension age
- 625,000 individuals lose, of which the majority are below State Pension age
From this measure, 2020 to 2021 estimated impacts by gender are:
- 30.7 million individuals will benefit - of these, 17.9 million (58%) are male and 12.8 million (42%) are female
- 148,000 individuals will be taken out of tax - of these, 65,100 (44%) are male and 82,600 (56%) are female
- 314,000 individuals will be taken out of the higher rate of tax - of these, 221,000 (70%) are male and 93,800 (30%) are female
- 901,000 individuals lose, of which 562,000 (62%) are male and 339,000 (38%) are female
From this measure, 2020 to 2021 estimated impacts by age are:
- 30.7 million individuals will benefit - of these, 24.6 million (80%) are below State Pension age and 6.1 million (20%) are above State Pension age
- 148,000 individuals will be taken out of tax - of these, 105,000 (71%) are below State Pension age and 43,200 (29%) are above State Pension age
- 314,000 individuals will be taken out of the higher rate of tax - of these, 277,000 (88%) are below State Pension age and 37,900 (12%) are above State Pension age
- 901,000 individuals lose, of which the majority are below State Pension age
Impact on business including civil society organisations
Impacts on administrative and compliance cost for businesses, employers, pension providers or civil society organisations will be negligible. An individual’s Personal Allowance is reflected in their PAYE tax code. Any changes to individuals’ tax codes are a routine annual event for employers and pension providers. Non-routine changes are handled by HM Revenue and Customs (HMRC).
Operational impact (£m) (HMRC or other)
There will be no significant operational impacts on HMRC. This change will be administered as part of the regular uprating process and will cost around £50,000.
Other impacts
None have been identified.
Monitoring and evaluation
HMRC and HM Treasury will seek to assess the cumulative labour market effects of Personal Allowance increases in the context of other relevant tax and benefit changes.
Further advice
If you have any questions about this change, contact the Income Tax Structure and Earnings team by email: [email protected].