Policy paper

Income Tax: personal allowance indexation

Published 8 July 2015

Who is likely to be affected

Income Tax payers, and those whose income is close to the Income Tax threshold.

General description of the measure

This measure will ensure that the personal allowance automatically increases in line with the equivalent of 30 hours a week at the national minimum wage once the personal allowance has reached £12,500. This refers to the national minimum wage rate that individuals over 21 are entitled to.

This measure will also introduce a legal duty for the Chancellor of the Exchequer to consider the level of the national minimum wage in setting the personal allowance each year, until it reaches £12,500. The Chancellor will be required to report to Parliament at each Autumn Statement or Budget to set out how he has met this legal duty.

Policy objective

This measure delivers the government’s objective to support and rewards individuals in work. It also provides additional certainty about the level of personal allowances.

Background to the measure

This measure was announced at Summer Budget 2015.

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. The personal allowance is currently £10,600 (in 2015 to 2016) and is set to rise to £11,000 (in 2016 to 2017).

The government also has an objective to ensure that individuals working 30hrs at the national minimum wage, will not pay Income Tax.

Detailed proposal

Operative date

This measure will have effect on and after the date of Royal Assent to Summer Finance Bill 2015.

Current law

Finance Act 2014 changed the basis of indexation for income tax allowances and limits from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI).

Income Tax personal allowances, the basic rate limit, the starting rate limit for savings and the adjusted net income limit are increased each year by the annual percentage increase in the CPI (‘indexation’).

Proposed revisions

Legislation will be introduced in Summer Finance Bill 2015 to change the indexation of the personal allowance to increase in line with the annual equivalent of 30 hours a week at the national minimum wage where the adult rate for individuals over the age of 21 will apply. This change will take place once the personal allowance has reached £12,500.

Before the start of each tax year where the personal allowance is less than £12,500, the Chancellor must consider the impact of the level of personal allowance on an adult worker working 30 hours per week on the national minimum wage.

Summary of impacts

Exchequer impact (£m)	2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
	nil	nil	nil	nil	nil	nil
	This measure is not expected to have an Exchequer impact.
Economic impact	This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families	Actual gains for individual taxpayers will vary according to individual circumstances. This measure is not expected to negatively impact on households and families.
Equalities impacts	This measure is not expected to have any impact on protected groups.
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) (HM Revenue and Customs (HMRC) or other)	There will be no significant operational impacts for HMRC.
Other impacts	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 contact Paul Phillips on Telephone: 03000 586521, email: paul.phillips1@hmrc.gsi.gov.uk.