Personal Allowance Linked to Earnings not Inflation

Personal Allowance Linked to Earnings not Inflation.

Many people may not be aware given the significant increases in the personal allowance over the last few years that increases in the personal allowance were linked to CPI (consumer prices index). CPI is the newer measure of inflation and is generally lower than the old measure of inflation RPI (retail prices index) because CPI does not include things like housing costs and mortgage payments.

The personal allowance the amount you can have in income before any tax is due in the tax year.

As you may be aware, from the Summer Budget 2015, the Chancellor confirmed that the government is committed to increasing the personal allowance to £12,500 by the year 2020. In addition, the Chancellor also confirmed that after 2020 the personal allowance will then increase each year in line with the national minimum wage for people working 30 hours a week or more.

Technically, by linking the personal allowance to the national minimum wage the government is pledging that the personal allowance will increase by wage inflation and not consumer prices. This means that people will not get poorer because the portion of their earnings that are earned tax-free will remain in proportion.

Being cynics, we believe this move whilst, welcome as we all will feel better if the starting point at which we pay tax keep place with wages, it is also about the government expecting higher prices inflation in the coming years. We have long written about the risks of inflation and we believe that we will enter a period of higher inflation in just a couple of years’ time. This will then drive property prices up which means the government will receive more revenue in stamp duty, inheritance tax, more assets available for care fees means testing as well as a greater share of profits from people who have bought property using the help to buy scheme (where government own a proportion of the property having helped with the deposit).

We also believe that just because the personal allowance is increasing, it does not mean that the thresholds where we start to pay higher rate tax (40%) and the additional rate of tax (45%) will increase at the same rate.