News, Culture & Society

Income boost for 29m workers next year as Budget raises tax-free allowance to £11k and 40p threshold is hiked to £43.3k

Some 29million British workers will be in line for a pay rise next year when the tax threshold is raised from £10,600 to £11,000, George Osborne has announced.

The Chancellor also pledged that the threshold – the amount any worker can earn before paying income tax – will rise to £12,500 before 2020 and will always rise in line with the national minimum wage.

And in a further boost for middle class workers the threshold for the top 40p tax rate will go up from £42,385 this year to £43,000 next year, rising to £50,000 by 2020.

Boost for workers: Chancellor George Osborne has announced the tax threshold will be raised from £10,600 to £11,000, while the threshold for the top 40p tax rate will go up to £43,000

It means around 130,000 people will be taken out of paying the 40p rate as the Chancellor promised to finish the job of fixing the economy and make Britain a low-tax, high-wage economy. 

He said: ‘Britain deserves a pay rise and Britain is getting a pay rise.’ 

In a shock move the Chancellor announced the introduction of a new National Living Wage of £7.20 for workers aged 25 or over which will rise to £9 by 2020.

Some six million people will see their pay increase as a result – and those currently earning the minimum wage of £6.50 an hour will be £5,000 better off by 2020, The Chancellor claimed.

He told MPs: ‘Working people aged 25 and over will receive it. It will start next April, at the rate of £7.20.

‘The Low Pay Commission will recommend future rises that achieve the Government’s objective of reaching 60 per cent of median earnings by 2020.

‘That is the minimum level of pay recommended in the report to the Resolution Foundation by Sir George Bain – chair of the Low Pay Commission.

‘Let me address the impact on business and employment. The OBR today say that the new national living wage will have, in their words, only a ‘fractional’ effect on jobs.

‘The OBR have assessed the economic conditions of the country, and all the policies in the Budget. They say that by 2020 there will be 60,000 fewer jobs as a result of the national living wage but almost one million more in total.’

Delight: Works and Pensions Secretary Iain Duncan Smith punches the air the Chancellor announces the introduction of a National Living Wage for over 25s

Delight: Works and Pensions Secretary Iain Duncan Smith punches the air the Chancellor announces the introduction of a National Living Wage for over 25s

The changes will mean a pay rise for 2.5million with those on the minimum wage seeing pay increase by more than one third over the Parliament – or more than £5,000 for a full-time worker.

However the tax breaks will come hand in hand with welfare reforms with the amount families can claim in benefits being cut from £26,000 to to £23,000 in London and the South East and £20,000 a year in the rest of the country.

Additional reforms will see support through tax credits and universal credits limited to two children.

The rate at which a household’s tax credit is reduced as it earns more is to be increased to 48 per cent, and the income rise disregard reduced from £5,000 to £2,500.

Income threshold for tax credits to be reduced from £6,420 to £3,850, with similar reductions for Universal Credit work allowances, which will no longer be awarded to non-disabled claimants without children. 

Working age benefits will be frozen for four years, after years of handouts rising faster than wages for those in work. Tax credits will only be offered for the first two children in families. 

Mr Osborne said he was following the Conservative tradition as the party that brought in protections for mill workers during the industrial revolution.

‘Taken together with all the welfare savings and the tax cuts in this Budget, it means that a typical family where someone is working full-time on the minimum wage will be better off,’ Mr Osborne told MPs.

But acting Labour leader Harriet Harman responded by claiming the Budget was ‘making working people worse off’ by cutting tax credits for the low paid and grants for students from poorer backgrounds.

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.