Budget 2012: Personal allowance to rise £10,000 by 2014

The tax-free personal allowance will rise to £10,000 by April 2014, a year earlier than previously planned.

The Coalition Agreement commits the government to raise the allowance to £10,000 by the end of the Parliament, in 2015. According to the BBC, chancellor George Osborne will announce in this afternoon’s Budget that pledge will be delivered in April 2014.

The personal allowance is currently £7,475 and in 2011’s Budget Osborne announced it will go up to £8,105 from April. Osborne will say the personal allowance will rise to £9,205 in April 2013 and then to £10,000 in April 2014.

Under current rules only salaries under £100,000 will receive the full personal allowance which is is phased out between £100,000 and £115,000.

Raising the allowance to £10,000 was a key plank of the Liberal Democrats’ election campaign and leader Nick Clegg has been pushing for the government to move “further and faster” towards the pledge. In January, he said further progress was needed because the pressure on family finances is “reaching boiling point”.

The Institute for Fiscal Studies estimates the annual cost of introducing the £10,000 personal allowance in 2014 rather than allowing it to rise with inflation to £8,885 in 2015/16, as assumed by the Office for Budget Responsibility, to be £6.5 billion. The Guardian reports £1.5 billion of the money is coming from a new 7% stamp duty charge on properties over £2m. The Telegraph says another £2 billion will come from fresh cuts in government spending.

The IFS has also cast doubt on government claims that raising the threshold is a progressive approach to tax reform.

A recent report says: “The common assertion that increasing the personal allowance is progressive is true if one considers the gains across individual income taxpayers. It is not true if one considers the gains across all families as relatively few of the poorest families contain a taxpayer and two-earner couples gain twice as much in cash terms as one-earner families”.