With a general election imminent, the lack of harsh measures in George Osborne’s Budget surprised few people, but there was no doubt that it will benefit many demographics, with the so-called ‘squeezed middle’ in line for the biggest boost.
Perhaps the biggest move was an above-inflation hike of the threshold at which workers begin to pay the 40p higher income tax rate, with this moving to £42,385 from April 1st – a £520 increase from the former £41,865 threshold.
This threshold will then increase by £915 to £43,300 by 2017/18, but this is not the only increase that will benefit taxpayers in the coming months.
The single person’s tax-free allowance is set to rise to £10,800 from April 2016, which is greater than the £10,600 previously announced, before then increasing to £11,000 the following year, Mr Osborne noted.
The effects of this are twofold, with the rise in personal allowance resulting in tax cuts for 27 million people, making the basic-rate taxpayer better off and saving money for those paying the higher tax rate.
Secondly, as the increase in the personal allowance is not offset by a reduction in the 40p threshold, higher-rate taxpayers will doubly benefit.
According to Treasury calculations, 100,000 fewer taxpayers will end up in the higher rate tax band as a result of the above-inflation increase in the 40p income tax threshold, with the 1.4 per cent hike in the higher-rate threshold representing the first above-inflation rise for seven years.
Analysts say the higher personal allowance is a shot in the arm for pension freedoms, boosting the tax-free amount people can draw from their pensions, while married couples will also benefit, as the transferable tax allowance for couples will rise by £50 to £1,100 from the current £1,050.
The biggest beneficiaries are set to be stay-at-home parents and those who work part time, though the Tories say the measure is part of a wider move to achieve the goals set out by Prime Minister David Cameron at the 2014 Conservative conference.
There, he spoke of introducing a personal allowance – below which no income tax is payable – of £12,500, and a higher rate threshold of £50,000 by the end of the next Parliament in 2020.
The changes to the higher rate tax threshold are set to cost the Exchequer around £960 million in 2016/17, £1.48 billion in 2017/18, £1.585 billion in 2018/19 and £1.68 billion in 2019/20.
One key observation is that the Chancellor’s figures will likely require a major hike in the higher-rate threshold in the final years of the next Parliament, in order to reach the 2020 target.
The Treasury has meanwhile indicated that the Budget announcement is akin to a ‘down-payment’ on future increases, with levels revised upwards at subsequent budgets if the Conservative Party is victorious in May’s General Election.
And that is the key point on which the measures set out by Mr Osborne hinge; a new government would be likely to overhaul much of the legislation set out by the current Chancellor, creating additional uncertainty for taxpayers and savers and meaning any imminent financial decisions are perhaps best delayed until the results of the polls have been tallied.