Millions of workers will get an automatic pay rise next year as the personal allowance rises in England and Wales.
This is the amount you can earn without paying income tax – it’s currently £12,500.
The rate has been rising steadily in recent years, it rose to £11,850 in 2019 and £12,500 this year. Now it’s set to reach £12,570.
That means anyone earn above the threshold will get a £14 boost in their take home pay.
The increase, hidden in the Spending Review small print, is linked to the Consumer Prices Index (CPI) – a rate of inflation – which came in at 0.5% in September.
“The Government will increase the 2021-22 Income Tax Personal Allowance and Higher Rate Threshold in line with the September CPI figure,” the Treasury said.
“The Government will also use the September CPI figure as the basis for setting all National Insurance limits and thresholds, and the rates of Class Two and Three National Insurance contributions, for 2021-22.”
The announcement means you’ll pay no income tax on the first £12,570 of money you earn from April – that’s an extra £70 of tax-free income.
And it’s good news for higher earners too, as from April next year, you won’t have to pay 40% tax until you earn £50,250.
The CPI inflation figure used to make these assessments will also be used for new National Insurance limits and thresholds, and the rates of Class 2 and 3 National Insurance contributions in 2021/22.
The Low Incomes Tax Reforms Group (LITRG) said national insurance contributions, the class 1 primary threshold at which people start paying contributions, could increase from £183 a week to £184.
Based on someone earning a £25,000 salary, they would pay £14 less in income tax and £5.64 less on class 1 NIICs.
Someone earning £55,000 a year, would see an income tax fall of £64 and class 1 NICs reduction of £19.36, LITRG said.
However, LITRG said those on the lowest incomes could still lose out, while those on higher incomes could see any benefits wiped out due to inflation.
Joanne Walker, LITRG technical officer said those on universal credit will likely see their payments fall as a result of the rise
“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,” she said.
The personal allowance is the amount you can earn tax-free each year – right now, it’s £12,500.
You then pay 20% income tax on the next £37,500 you earn, 40% tax on the next £100,000 you earn and 45% on any money made over that.
These are the current personal allowance rates:
- Low earners: If you earn £12,500 or less, you pay no income tax
- Basic rate: If you earn £12,501 to £50,000, you pay 20% tax
- Higher rate: If you earn £50,001 to £150,000, you pay 40% tax
- Additional rate: If you earn £150,000 or more, you pay 45% tax