A reader has asked me about this campaign pledge from the Lib Dems, where they say they will increase the income tax personal allowance to £10,000 if they win the next election. They say this could mean an extra £700 a year for low- and middle-income voters.

Let’s look at the numbers and see if they are right. As you can see on The Salary Calculator “about” page, the current allowance is £6,475 for under-65s. Increasing this to £10k would give everyone an extra £3,525 untaxed, and for those in the 20% tax band this would be £705, matching what the Lib Dems claim.

However, they have to raise this extra money from somewhere – as you can see on their website they have listed some areas they might take the money from, including taking National Insurance on benefits in kind and second jobs. Also, they may lower the threshold between the 20% and 40% rates, meaning smaller savings for those in the higher bracket.

At first glance, those in the 40% tax bracket will save even more with this increase in personal allowance (up to £1,410!), but if the threshold were lowered this effect would be smaller, and as you can see on the Lib Dem website, they also talk about modifying tax relief so that pension contributions are only tax free on the 20% rate. As always, the devil is in the detail!

Needless to say, should they come to power The Salary Calculator will be updated when they make good on this campaign promise.

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Income Tax, Pay As You Earn

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5 Comments to Liberal Democrats pledge to lower income tax

  1. Speaking of updates to the calculator, your website on the page says that it is current as of 2006. Has it been updated since then to reflect the current tax rates?

  2. Marek on October 29th, 2009
  3. The UK calculator is completely up-to-date, with the 2009 rates. However, the US calculator has unfortunately only got the 2006 rates, so it is not current. I plan to update it soon with the rates from January 2010.

  4. admin on October 29th, 2009
  5. I had my own go at raising the tax free allowance to £12,000 over here, I’d really appreciate if you could check to see if it -checks- out.

    http://byrnetofferings.co.uk/2009/11/tax-free-allowance/

  6. Thomas Byrne on December 1st, 2009
  7. Impressive work Thomas! I can’t say I’ve checked all the numbers, but just a comment on your suggestions for public sector pay. As far as I can tell, you’ve not included income tax and national insurance PAYE in your calculations – some of the money paid to public sector employees comes back into government coffers immediately (how much depends on the tax bands and the individual concerned, of course – for top-rate payers this would be around 50%, including NI).

    This means (again, unless I’ve missed it in your calculations) that the true savings for the public sector pay freeze, top 10% pay cut and pension contribution increase (since pension contributions are not taxed) would not be as much as you have stated.

    I’d also suggest that by removing bus subsidies the bus companies would simply put their prices up – arguably hitting poorer families worst and undoing some of the work done by raising the personal allowance in the first place.

  8. admin on December 2nd, 2009
  9. I’m not sure how that would work exactly. (NI isnt really something I’ve looked at).

    As for the buses, I think that’s pretty much a short term issue if one at all, the fuel subsidy is one of the reasons local buses are so uncompetitive.

  10. Thomas Byrne on December 7th, 2009

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