Select Committee on Treasury First Special Report


Table A1: effects of 2008 Pre-Budget Report measures in 2011-12 compared to April 2008 by income bracket (millions of individuals)[4]

ANNEX A: FURTHER INFORMATION ON THE 2008 PRE-BUDGET REPORT PERSONAL TAX MEASURES

The Government included detailed distributional analysis of the Budget 2007 reforms and the 13 May announcement in its memorandum to the Treasury Committee inquiry Budget Measures and Low-Income Households.

  • This annex sets out more detail of the distributional effects of the 2008 Pre-Budget Report.[2]

It shows the effects of the 2008 Pre-Budget Report personal tax measures (including the 13 May increase to personal allowances) on an individual basis for 2011-12, when all the changes have come into place. The main personal tax measures in the 2008 Pre-Budget Report were to income tax and National Insurance thresholds, rates and allowances. As these apply independently to each taxpayer, the clearest analysis of their effects is on an individual basis.

Summary of 2008 Pre-Budget Report personal tax measures (from Chapter 5 of the Pre-Budget Report)

Budget 2007 continued the Government's reforms of the tax and benefit system by reducing the basic rate of income tax and increasing support for many low-income households. To provide further support for low- and middle-income households, the Government announced in May an additional £600 increase in the personal tax allowance for this year, providing up to £120 to around 22 million basic rate taxpayers aged under 65. This helped those affected by the removal of the 10p tax rate.

On 13 May the Chancellor made clear that the £600 increase in personal allowance for this year was brought forward from the 2008 Pre-Budget Report, and that proposals for next year and beyond would be set out in the 2008 Pre-Budget Report.

The 2008 Pre-Budget Report makes permanent the £600 increase in the personal allowance and the £1,200 reduction in the basic rate limit announced in May, and announces further reforms to personal tax. These changes will provide additional help for low- and middle-income families next year. In April 2009, the Government will increase the personal allowance by £130 above indexation. This goes further than the announcement in May, and is on top of the £600 increase for 2008-09. It means 22 million basic rate taxpayers under 65 will pay £145 less tax in real terms in 2009-10.

The Government will also maintain the additional £130 of personal allowance in

April 2010, continuing this extra support for a further year. The real terms benefit will increase in 2010-11, when the Retail Price Index (RPI) measure of inflation is projected to be negative. To reduce the gain for higher rate tax payers from the real terms benefit of negative inflation on tax allowances and limits, the basic rate limit will be held at its 2010-11 value in 2011-12.

The Pre-Budget Report sets out measures which put the public finances on a path to achieve cyclically-adjusted current balance and a declining debt to GDP ratio by 2015-16. These measures are a combination of adjustments to both taxation and spending, including reforms to income tax and national insurance contributions (NICs):

-  the income tax personal allowance will be restricted for those with incomes over £100,000 - the two per cent of people with the highest incomes - from April 2010, when the economy is forecast to be growing. From that level of income, the personal allowance will be reduced at a rate of £1 of allowance lost for every £2 of income over that level until it is halved in value. At this value, the personal allowance will be worth the same as for a basic rate taxpayer. From £140,000 of income, the remaining allowance will be completely withdrawn at the same withdrawal rate, so that people with the very highest incomes do not benefit from the personal allowance

-  a new additional higher rate of income tax of 45 per cent (and 37.5 per cent for dividend income) for those with incomes above £150,000 from April 2011. This will ensure that people with the very highest individual incomes pay a greater share of their income in tax; and

-  a 0.5 per cent increase in the employee, employer and self-employed rates of NICs from April 2011, alongside an increase above indexation in the point at which individuals start to pay NICs - known as the primary threshold - so that it is aligned with the personal allowance. This will ensure that the fiscal consolidation is broad based, without affecting those over state pension age, who do not pay NICs. These changes will be introduced from 2011, when the economy is forecast to be growing above trend rates and real incomes are growing strongly.

  • Individual analysis of the 2008 Pre-Budget Report personal tax measures[3]
  • As above, the clearest way to show the effect of the 2008 Pre-Budget Report personal tax changes for 2011-12, when all changes have been introduced, is on an individual level, as the main changes coming into effect that year are to income tax and NICs, not to tax credits or other forms of household support.
  • Table A1 below shows the effects of the Pre-Budget Report measures in 2011-12, when all measures have been brought in, compared to April 2008, before the increased personal allowance announced in May 2008 (which was a decision brought forward from the Pre-Budget Report). It looks at all taxpayers in 2011-12.
  • This shows that:
    • -  in April 2011, 23 million taxpayers with incomes below £40,000 will pay less tax and NICs than in April 2008 in real terms
    • -  on the same basis, people with incomes between £40,000 and £100,000 a year will pay slightly more income tax and NICs, around £3 a week on average
    • -  those with incomes between £100,000 and £140,000 will pay around £22 a week more on average in income tax and NICs, while those between £140,000 and £200,000 will pay on average £61 a week, and progressively more as income rises.

Individual income bracket (£ thousand)
Individuals paying less net tax
No change
Individuals paying more net tax
Total number (m)
Average weekly change (£)
Total number (m)
Total number (m)
Average weekly change (£)
Less than 10
4.5
3.4
0.4
0.0
0.0
Between 10 & 15
4.6
3.6
1.8
0.0
0.0
Between 15 & 20
3.9
3.3
0.9
0.0
0.0
Between 20 & 25
3.5
2.9
0.5
0.0
0.0
Between 25 & 30
2.8
2.4
-
0.0
0.0
Between 30 & 35
2.2
2.1
-
0.0
0.0
Between 35 & 40
1.7
1.8
-
0.0
0.0
Between 40 & 50
1.0
1.9
0.0
1.3
-1.5
Between 50 & 75
0.4
2.7
0.0
1.2
-2.8
Between 75 & 100
0.1
2.7
0.0
0.4
-4.9
Between 100 & 140
-
-
0.0
0.3
-22.4
Between 140 & 200
0.0
0.0
0.0
0.2
-60.7
Over 200
0.0
0.0
0.0
0.2
increasing with income
Total
25.0
2.9
3.8
3.6
-25.9
Source: HMRC analysis using the 2005-06 Survey of Personal Incomes


2   Unless otherwise stated, for annex A and B, all analysis is in 2008-09 prices. Weekly changes in net tax paid are rounded to the nearest 10 pence. Numbers of individuals or households are rounded to the nearest 0.1m.  Back

3   Individual level analysis is produced by HM Revenue and Customs using its own microsimulation model and data from the 2005-06 Survey of Personal Incomes (SPI), which better captures the number of high income individuals. There is only limited information on the individual in the SPI. It cannot, therefore, be used to model tax credit or benefit changes. This means it cannot model the Budget 2007 reforms and can only show the combined effects of the 13 May announcement and 2008 Pre-Budget Report. Similarly, it does not model any consequential effects on income related benefits such as Housing Benefit or Council Tax Benefit. A larger sample size compared to the EFS means that results have been rounded to the nearest 10,000.  Back

4   N.B. Figures may not sum due to rounding. Total numbers are rounded to the nearest 100,000.

'-' signifies 50,000 or fewer. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2008
Prepared 15 December 2008