Policy paper

Income Tax: personal allowance and basic rate limit for 2017 to 2018

Published 16 March 2016

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 £11,500 for 2017 to 2018. The basic rate limit will be increased to £33,500 for 2017 to 2018. As a result, the higher rate threshold will be £45,000 in 2017 to 2018.

Policy objective

This policy is intended to ensure progress is made towards the government’s commitment to raise the personal allowance to £12,500 and the higher rate threshold to £50,000, by the end of this parliament.

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 the end of this parliament.

This measure will increase the personal allowance for 2017 to 2018 to £11,500, and the basic rate limit will be increased to £33,500 for 2017 to 2018. As a result, the higher rate threshold will be £45,000 in 2017 to 2018.

Detailed proposal

Operative date

This measure will have effect on and after 6 April 2017.

Current law

The Summer Finance Bill 2015 set the personal allowance for 2017 to 2018 at £11,200, and the basic rate limit for 2017 to 2018 at £32,400.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to set the personal allowance for 2017 to 2018 at £11,500, and the basic rate limit for 2017 to 2018 at £33,500.

The table below sets out the thresholds from 2016 to 2017 to include the changes from this measure.

  2016 to 2017 2017 to 2018
Personal allowance (PA) 11,000 11,500
Basic Rate Limit (BRL) 32,000 33,500
Higher Rate Threshold (HRT) 43,000 45,000

The National Insurance contributions (NICs) Upper Earnings/Profit Limits is aligned to the higher rate threshold and will therefore also increase for 2017 to 2018.

Summary of impacts

Exchequer impact (£m)

2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021
- -2,030 -2,540 -2,510 -2,590

These figures represent the combined Exchequer impact of ‘Personal Allowance: increase to £11,500 in April 2017’ and ‘Higher Rate Threshold: increase to £45,000 in April 2017’. The figures for these measures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.

Economic impact

This measure will reduce Income Tax for 28.9 million Income Tax payers in 2017 to 2018, 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. Figures for individuals that are taken out of higher rate tax exclude Scottish taxpayers as the Scottish government will set its own Income Tax rates and thresholds for non-savings, non-dividend income from 2017 to 2018.

In 2017 to 2018, this measure will benefit 28.9 million individuals of whom 24.1 million will be basic rate taxpayers and 4.5 million are higher rate taxpayers. A basic rate taxpayer will have an average real gain of £56. A higher rate taxpayer will have an average real gain of £233. An additional rate taxpayer will have an average real gain of £110. These above inflation increases will take an additional 424,000 individuals out of Income Tax altogether in 2017 to 2018 compared to previously announced policy. 1.3m individuals have been taken out of tax as a result of changes announced since 2015 to 2016. 359,000 individuals are taken out of higher rate tax in 2017 to 2018 compared with previously announced policy. 585,000 are taken out of higher rate tax as a result of changes announced since 2015 to 2016.

1.6 million individuals will have an average real loss of £23 in 2017 to 2018.

All taxpayers with income of £123,000 or above in 2017 to 2018 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.

Cumulative changes to the personal allowance and higher rate threshold between 2015 to 2016 and 2017 to 2018 mean a typical basic rate taxpayer will have an overall cash gain of £180 and a real terms gain of £166. A typical higher rate taxpayer will have an overall cash gain of £442 and a real terms gain of £399.

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 £1,005 in 2017 to 2018. A typical higher rate taxpayer will have an overall cash gain £1,118 in 2017 to 2018.

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 2016 to 2017, there will be one personal allowance for all individuals regardless of an individual’s date of birth.

In 2017 to 2018, males are projected to account for 58% of all taxpayers and females 42%.

From this measure, 2017 to 2018 estimated impacts on males/females are:

  • 28.9 million individuals will benefit - of these, 16.5 million (57%) are male and 12.4 million (43%) are female
  • 1.6 million individuals lose, of which 1.3 million (82%) are male and 282,000 (18%) are female
  • 424,000 individuals are taken out of tax altogether, of which 170,000 (40%) are male and 254,000 (60%) are female
  • 359,000 individuals are taken out of higher rate tax, of which 245,000 (68%) are male and 113,000 (32%) are female

From this measure, 2017 to 2018 estimated impacts by age are:

  • 28.9 million individuals will benefit. Of these, 22.7 million (78%) are below state pension age (SPA) and 6.2 million (22%) are above SPA
  • 1.6 million individuals lose, of which all are below SPA
  • 424,000 individuals are taken out of tax altogether, of which 256,000 (60%) are below SPA and 169,000 (40%) are above SPA
  • 359,000 individuals are taken out of higher rate tax, of which 317,000 (88%) are below SPA and 42,000 (12%) are above SPA

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. HMRC will need to make IT changes but this will be done at negligible costs.

Other impacts

Small and micro business assessment: the impact on small and micro businesses is expected to be negligible because changes to tax thresholds are a routine annual event. HMRC publishes a PAYE tax calculator on the GOV.UK website to help micro businesses to calculate their payroll deductions.

Other impacts have been considered and 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, please email: incometax.structure@hmrc.gsi.gov.uk.