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Tax changes will make average worker £800 a year better off

LOW and middle-income earners will benefit from rises in the tax threshold that the Chancellor said would see an average British worker £800 a year better off.

The increase in the personal allowance limit - the amount you can earn before tax - was the most expected and widely trailed policy prior to yesterday's Budget announcement, coming on the back of successive increases over previous Budgets.

From April 2015, incomes of up to £10,500 will be free from tax, up £500 on current rates.

Meanwhile, the 40p tax threshold for middle-income earners will also rise by about £400 from £41,450 to £41,865, cutting income tax in half for those whose salaries fall between the current and new limit.

The move was a disappointment for those wanting to see a big rise in the starting point for the higher rate of tax - this year's small increase will be followed by another below-inflation 1% to £42,285 next year.

However, Mark Houston, a tax specialist for Glasgow- based accountants Johnston Carmichael, said both changes were significant compared to past personal tax rates.

Mr Houston said: "When you consider that just a few years ago we had people paying income tax from a threshold of £6500 and now we are going to be up at £10,500, you see the significance of the increase. That difference will have pulled so many people out of the tax threshold, and £10,500 seems like a fair place to go.

"In relation to the 40p rate of tax, there used to be just one million earners who fell into that tax bracket when it was first brought in, but that has grown to five million. So although there has not been a huge change and we do not know the numbers yet, that will have helped a decent number of middle-income earners cut their tax bill.

"We have one more Budget before the election and I would not be surprised if they take even more people out of the 40p rate by then."

However, critics argued the Budget was a "missed oppor­tunity" to pull more out of the top tax band.

Mark Littlewood, director general at the Institute Of Economic Affairs, said: "This is an attack on aspiration and entrepreneurship. Whilst the increase in the personal allowance is a welcome move, it should not have come at the expense of tax cuts in other areas.

"The Government should have announced above-inflation increases in the thresholds for inheritance tax, stamp duty and the higher rate of income tax to begin to compensate for years - or decades - of under-indexing.

"This could have been financed by the reversal of misguided spending commitments on childcare and also by not reducing the starting rate of tax for savers."

The 40p tax band for middle-income earners was first brought in 25 years ago by the Thatcher government. Nigel Lawson, the Chancellor who introduced it, had called on George Osborne to scrap it amid fears too many "middling professionals" were now falling into the category.

However, it seems unlikely any party will axe the 40p rate, with top earners a more likely battleground between Labour and the Conservatives.

Labour has pledged that if it wins the next election it will reinstate the 10p tax rate for low earners and raise the top rate of tax to 50p for those earning more than £150,000 a year.

It was the previous Labour Government that introduced the 50p tax rate on high earners in 2010, but it was reduced under the Coalition to 45p and there was no change in the latest Budget.

Jonathan Isaby, chief ­executive of the TaxPayers' ­Alliance, said: "Raising the personal allowance again next year will lift more taxpayers out of tax and cut the bill for everyone paying the basic rate.

"While higher rate taxpayers up to £100,000 will not be hit again, the 40p threshold remains much lower than where it would have been if it had increased over time with earnings. The 45p rate should also have been abolished."

Tom Harris, who was Labour's transport minister between 2006 and 2008, said it was "a matter of some regret" that his party did not back the government's plans to raise the personal tax allowance to £10,500, and also called for income tax to be abolished for those earning the national minimum wage.

The MP for Glasgow South said: "One of the arguments against raising the bottom of the threshold is that it also has a benefit for people higher up the income scale. Well, I support it, not despite its tax-cutting effect on the better-off, but because of it ... I don't regard tax as an unalloyed good thing, I see it as a necessary evil."

However, Neil Mathers, head of Save The Children in Scotland, said the Budget offered little for struggling families.

He said: "Poorest children were hit hardest in the recession and there is a huge risk of leaving them behind in the recovery.

"The childcare announcements are a step forward, but they were isolated in a Budget that mainly focused on businesses and savers."

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