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United Kingdom Has Cut Taxes for Many with a Larger Personal Allowance

2 min readBy: Kyle Pomerleau

Starting next week (the beginning of the 2014-2015 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. year), the United Kingdom’s personal allowance (equivalent to the United States’ personal exemption) will increase to £10,000 from £9,440.

According to the Economic Times, this is a substantial tax cut for many low-income UK taxpayers:

“The increases in the tax-free personal allowance to £10,000 pounds in 2014-15 means that overnight on Sunday, an extra 200,000 people will no longer pay income tax.

“Over 26 million people – the vast majority of working people – will have benefited from the personal allowance increases over the past four years.”

For a comparison, the United States’ personal exemption is $3,950. However we also have a standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for individuals equal to $6,200.

The personal allowance will increase again to £10,500 the following year.

However, this isn’t the whole story. Many people will be seeing a corresponding tax increase. From the Guardian:

“The biggest impact will be felt by those earning £42,000, who from next month will find themselves higher rate tax payers, and will be required to declare any extra income such as interest on savings, overtime, or share dividends – and pay 40% income tax on those earnings.

“Since the coalition took office four years ago, ‘fiscal drag’ means the higher-rate threshold has dropped by £4,910 in real terms, putting an extra 1.4 million people into the 40% bracket.”

In other words, taxpayers in the United Kingdom have been experiencing bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. . This is the phenomenon by which people are pushed into higher income tax brackets due to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. instead of any increase in real income. Even though taxpayers that make around £42,000 also benefit from the personal allowance increase, the jump into the 40 percent bracket will reverse some of those benefits. Nonetheless, they will still see a slight tax cut.