The Chancellor has announced today a change to the personal allowance to compensate many of those who were going to suffer from the abolition of the 10% tax rate.

The facts

The personal allowance is the amount an individual can receive without paying any tax at all. This will be increased for everyone(below the age of 65 - pensioners 65+ already get enhanced personal allowances. The amount of the personal allowance will increase from £5,435 to £6,035 for the current financial year, i.e. that running from 6 April 2008 to 5 April 2009. In tax terms this means a saving of £120.

Only basic rate tax payers will benefit from this change, as the Chancellor has stated that he will reduce the level of income at which higher rate tax is paid, so that higher earners’ tax bills are unaffected by this.

It therefore appears that the biggest winners of all these tax changes are those who would have been advantaged by the decrease in basic rate tax (but not disadvantaged by the 10% rate), and will also benefit from this increase in personal allowance, i.e. very roughly those people earning over £18k and less than £41k.

The whole story?

What is not certain at this stage is whether this will be the entirety of measures that will be put into place to compensate lower-income individuals, and this may not even be known by the Chancellor, but we aren’t holding our breaths.

What we are told by the Chancellor is that around 4.2 million households will be the same or better off than before the abolition of the 10% rate, and “the remaining 1.1 million households will see their loss at least halved”.

When will individuals “feel” the benefit?

While the self-employed will presumably just take this change into account when working out their tax bills, and submitting their tax returns, special provisions will be made for employees, with an extra £60 being received in September salaries (compared with previous months), and £10 per month being received for the remainder of the tax year.

As with all our information in The Business Lounge, this is not comprehensive tax advice, and may not apply to your specific circumstances; to discuss how these issues affect you, contact your accountant.