The chancellor announced some help for working people in the form of a surprise increase in the amount they can earn before paying any income tax. But there was a blow for many with the news that 400,000 more middle earners will be dragged into the 40% tax band over the next two to three years.
The personal allowance was due to rise from £8,105 in the current tax year to £9,205 in 2013-14, but George Osborne said it would now increase by £1,335 in April – £235 more than previously announced –so no tax will be paid on earnings of less than £9,440.
The Treasury said the move "will benefit an estimated 24.4 million individuals, and lift an additional quarter of a million people out of income tax altogether".
When the coalition government came into office the personal tax allowance stood at £6,475, and by April 2013 2.2 million of the lowest paid will have been taken out of tax altogether, it added.
Osborne said of the increase: "This is a direct boost to the incomes of people working hard to provide for their families. We are within touching distance of the £10,000 personal allowance."
higher rate income tax threshold will rise by just 1% in 2014-15 and 2015-16, so the income at which people start paying the 40% rate will go up from £41,450 in 2013 to £41,865 in 2014, and then to £42,285 in 2015.
Tony Bernstein, senior tax partner at chartered accountants HW Fisher & Company, pointed out that this 1% increase was less than wage and general inflation. "In practice, this will mean more taxpayers drawn into the higher rates and a continuation of the fiscal drag we have seen in recent years."
The Treasury admitted that compared to uprating the higher rate threshold by inflation, "these changes are expected to create around 400,000 more higher rate taxpayers by 2015-16". But it claimed, taking into account the income tax changes announced since 2010, "these new higher rate taxpayers will typically be over £270 better off in real terms over the parliament".
Osborne told MPs: "I want to be completely clear with people. This is an increase; in fact, it is the first cash increase in the higher rate threshold in this parliament. But it is not an increase in line with inflation, and so it raises £1bn of revenue by 2015-16."