FINANCE ACT BECOMES LAW AS TAX-FREE ALLOWANCE RISES TO £10,600

LONDON, 2015-03-26. — The Finance Act received Royal Assent today, putting into law an increase in the standard income-tax personal allowance to £10,600 for the financial year beginning on 6 April. The measure raises the amount that most people may receive before paying income tax by £600 against the present year’s allowance. It will benefit qualifying pensioners as well as employees and the self-employed, although it is not a separate exemption for retirement income. Coming barely a week after George Osborne’s Budget, the Act completes a principal part of the Government’s tax legislation before Parliament is dissolved for the general election.

For a basic-rate taxpayer able to use the whole increase, the additional £600 of tax-free income represents a saving of £120 over a full year, compared with an unchanged allowance. Someone whose taxable income falls between £10,000 and £10,600 may cease to owe income tax altogether. But the distinction between a tax reduction and an increase in income is important: a person already receiving less than the existing allowance gains nothing directly from raising it. Nor does the measure mean that every household will be £120 better off, since the result depends upon individual incomes, allowances and any interaction with means-tested support.

The new Act also provides for the standard allowance to rise to £10,800 in 2016–17 and £11,000 in 2017–18, carrying forward the programme announced by the Chancellor last week. April’s £10,600 figure had already been signalled in December’s Autumn Statement, when Mr Osborne improved upon the £10,500 previously planned. Today’s assent therefore turns a succession of announcements into statutory provision rather than introducing an unexpected concession. The allowance stood at £6,475 when the Coalition took office in 2010, and its subsequent increases have become one of the most prominent elements of the Government’s account of its economic record.

For pensioners, the position is complicated by the older system of age-related personal allowances. Those allowances have been frozen while the standard allowance catches up, a policy announced in 2012 which attracted strong criticism from pensioners’ representatives and the Opposition. The £10,600 standard allowance will now exceed the frozen £10,500 allowance previously applicable to one older group. Those born before 6 April 1938 may still qualify for an allowance of £10,660, subject to the relevant income rules. Thus the broad increase does not translate into an identical new tax saving for everybody above state pension age.

Retirement itself does not remove income from the tax system. State pension payments are taxable, although the pension is normally paid without tax being deducted at source; occupational and private pensions may also contribute to a person’s taxable total. Whether a pensioner pays income tax consequently depends on combined income rather than on any single payment. A pensioner whose only income is below the allowance remains outside the charge, while someone with a modest additional pension may benefit from the higher threshold. Today’s law changes the dividing line, not the underlying principle that pension income can be taxed.

The political purpose of the allowance increases is unmistakable as ministers prepare to defend their record at the polls on 7 May. In his Budget statement on 18 March, Mr Osborne declared: “Britain is walking tall again.” The Chancellor presented tax reductions alongside improving employment and the recovery in national output as evidence that the Government’s economic course should continue. The Liberal Democrats, whose leader Nick Clegg made a £10,000 personal allowance a central election commitment in 2010, also regard the increases as a defining Coalition achievement. The legislation therefore gives both governing parties a concrete measure to put before voters.

Labour disputes the Government’s broader account of living standards and argues that the recovery has not repaired the losses experienced by many families. Responding to the Budget last week, Ed Miliband called it “a Budget people won’t believe from a government they don’t trust”. That objection goes beyond the personal allowance itself: the election argument concerns wages, prices, public services and the distribution of the gains from recovery. The limits of an allowance increase are central to that dispute. People too poor to pay income tax cannot receive an income-tax cut, however welcome the measure may be to those just above the threshold.

The Bill has passed through Parliament on an exceptionally compressed timetable, with the Commons taking its principal stages yesterday before today’s completion of the parliamentary process. The approaching dissolution on 30 March has left little time between the Budget and the end of this Parliament. Royal Assent nevertheless gives the provisions legal force; they are no longer merely promises in a Budget speech. The distinction will matter to taxpayers arranging their affairs for April, although not every measure discussed by ministers during Budget week should be assumed to have become law through this single Act.

For financial markets, the allowance changes form part of a wider fiscal programme rather than a new development arriving without warning today. The Budget was accompanied by forecasts from the Office for Budget Responsibility, which expects the economy to grow by 2.5 per cent this year and 2.3 per cent in 2016. The Government must accommodate the revenue forgone through higher allowances while pursuing its borrowing objectives, leaving the balance between taxation and spending firmly in contention. Royal Assent settles the legislative position on these provisions, but it does not settle the political argument over how the public finances should be managed in the next Parliament.

The immediate practical task now passes to employers, pension providers and the tax authorities as they prepare for the new tax year. Tax codes and deductions must reflect the allowances for which individuals qualify, and pensioners with several sources of income will need to consider their overall position rather than the size of the state pension alone. Further increases are written into the Act, but future Parliaments retain the power to amend tax law. For now, the result is clear and limited: more income will be sheltered from tax from 6 April, while those already below the threshold will receive no direct addition to their pensions.