Hi All
I’ve been trying to get my head round this, but I’m obviously missing something rather fundamental. Anyway, in yesterday’s UK budget it was announced that the tax-free personal allowance on income will rise by £1100 from April 2013, which will apparently make most people about £200 a year better off. Can anyone explain, simply, why this doesn’t make me £1100 a year better off? I just can’t figure out what’s happening to the other £900…
Thanks
OB
I presume it means that the lowest tax bracket in the UK is something of the order of 18%.
Is it?
The tax-free allowance is the amount of your income which you can take home before the government starts taxing it, not the amount of tax the government is collecting from you. That income gets taxed at 20% - ie. about £200 of the £1100. The new changes mean that proportion of your income will be exempt from tax in future.
Yes, it isn’t an allowance of pure money (“Hey, here’s £1100!”), it’s an ‘allowance’ of your income that you can make without being taxed on it. Allowance is a bit of a misnomer because it’s still your money, but that’s why.
Look at it this way: Let’s say you earn £20,000.
In 2011/12, the first £7,475 is non-taxable, and the rest is taxable at 20%, so your total tax is:
(20,000 - 7,475) * 0.2 = 2,505.
Your take-home salary then becomes 20,000 - 2,505 = £17,495
In 2012/13, the non-taxable income rises to £8,105 (a rise of £630), so your total tax then is:
(20,000 - 8,105) * 0.2 = 2,379.
Your take-home salary then becomes 20,000 - 2,379 = £17,621
An increase in the allowance of £630 has only left you £126 better off.
I understand that. What I don’t understand is (and sorry if I’m just being dense 
), if I’m now taking home £8105 of my yearly pay tax free and from 2013 will be taking home £9205 of my yearly pay tax free, why am I not £1100 better off?
Say I’m earning £20000 pa, does this not mean that I’m currently only paying income tax on £11895 of my income after taking away the personal tax-free allowance and from 2013 will only be paying income tax on £10795 of my income? I really just can’t get my head round what I’m missing…
OB
Ok, the maths seems to work, but it still does my head in… I think I just need to calm down and trust to my betters ;).
OB
Because currently you’re not paying all of that £1100 as taxes; you get to keep 80% of it. Under the proposed change, you go from keeping 80% of that £1100 to keeping 100% of it, so your net gain is 20% of £1100.
Now that has soothed my aching mind - I think I’ve finally grasped it! Thank you all.