Budget 2017: Personal tax allowance and higher rate threshold to increase next year

The rates at which workers start paying income tax and are sucked into the higher band will both increase next year, after the Chancellor signaled that ministers will honour a manifesto commitment to continue raising the two thresholds.

The tax-free personal allowance will rise by £350 to £11,500, while the threshold for paying the 40 per cent rate will increase from £45,000 to £46,350.

The announcement came after Philip Hammond was heavily criticised earlier this year for breaking a separate manifesto pledge by the Conservatives on national insurance.

Setting out his budget, the Chancellor said the increase to the tax thresholds showed "progress towards our manifesto commitments" in June, which included raising the personal allowance to £12,500 and the higher rate to £50,000 by 2020.

A basic rate tax payer would be £1,075 a year better off as a result of the moves, he added.

However  analysts said the increase in the personal allowance to £11,850 was "less generous than some may think" because, at just over 3 per cent, it was only in line with inflation.

"High inflation means that the Government’s commitment to increase the personal allowance to £12,500 by 2020/21 may also start to look less generous, with only just over a 5 per cent further total increase now needed to reach this level," said David Kilshaw, a private client services partner at EY, the professional services firm.

Philip Hammond

The personal allowance has risen by more than £5,000 since 2010, while since 2015 the higher rate threshold has increased by almost £4,000.

Announcing the increases for next year, Mr Hammond told the Commons: "When we came into office the personal allowance stood at £6,475.

"From April, I will increase the personal allowance to £11,850, and the higher rate threshold to £46,350 - making progress towards our manifesto commitments.

"The typical basic rate tax payer will be £1,075 a year better off compared to 2010."

The announcement was welcomed by the Tory Workers group, which said the two moves would enable "middle income earners will keep more of their own money".

Iain McCluskey, a tax partner at PwC, said: "The tax free personal allowance has increased by over 40 per cent against inflation since 2010, removing the need for a considerable number of lower paid people to pay income tax.

"However, given the point at which national insurance is payable by employees starts at more than £3,000 below that of income tax,  the lowest paid taxpayers may reflect on whether a further raise in the personal allowance is the right way to support them."

Earlier this year Mr Hammond abandoned plans to raise national insurance for self-employed workers in the last Parliament after admitting that it breached the "spirit" of the Conservatives' 2015 manifesto.

The Chancellor had provoked a furious reaction from Tory back-benchers after using his Budget to announce plans to raise NI contributions for the self-employed by 2 per cent.

Mr Hammond wrote to Tory MPs after the March budget saying that while the changes he had announced were justified, the Government had chosen not to go forward with the rise in "class 4" national insurance contributions.