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Personal allowance set to rise 0.5% next year

Paloma Kubiak
Written By:
Paloma Kubiak

The personal allowance will rise in line with inflation from next year, the government has confirmed.

The personal allowance is the amount you can earn before having to pay any income tax.

It currently stands at £12,500 and means if you earn below this threshold, you shouldn’t have to pay any income tax.

As part of today’s Spending Review, it was confirmed that the government will increase the 2021/22 personal allowance in line with the September Consumer Prices Index (CPI) measure of inflation. This figure stood at 0.5%.

It will also apply to the higher rate threshold.

Further, the government confirmed it will also use the September CPI figure as the basis for setting all National Insurance limits and thresholds, and the rates of Class 2 & 3 National Insurance contributions, for 2021/22.

Personal allowance and thresholds

Calculations from the Low Incomes Tax Reforms Group (LITRG), reveal the personal allowance will rise to £12,570 while the higher rate threshold will rise to £50,250.

It added that for NICs, the class 1 primary threshold could increase from £183 a week to £184, while the upper earnings limit would rise from £962 a week to £967.

Based on someone earning a £25,000 salary, they would pay £14 less in income tax and £5.64 less on class 1 NIICs.

For someone earning £55,000 a year, they would see an income tax fall of £64 and class 1 NICs reduction of £19.36, LITRG calculated.

Joanne Walker, LITRG technical officer, said: “Too often, tax and related welfare laws and administrative systems are not designed with the low-income user in mind and this often makes life difficult for those we try to help.

“If a lower income worker is also claiming means-tested benefits, for any increase in their net of tax income (caused by these reductions), they are likely to see a fall in their benefits; for example with universal credit, there is a 63% taper, meaning they would only see 37% of the tax saving.

“These are quite small savings annually, and there might be more targeted ways of assisting lower income workers. For example, for those claiming universal credit, increasing the work allowance would be more beneficial. As ever, the personal allowance already takes a significant number of workers out of the tax system altogether, and an increase in the personal allowance does nothing to assist them.”