Tax allowances

By DAILY MAIL REPORTER
Updated:

 

The Daily Mail City team explains how tax allowances work

What are they?

They are the carrot that comes before the taxman's stick - they are the proportion of income exempt from tax. The Chancellor announces the concessions, usually with the Budget.

The Budget was weeks ago

Occasionally the Chancellor is forced to make changes at other times of the year due to unforeseen circumstances - otherwise known as errors of judgment.

What happened?

The government caused a revolt by taking the 22% tax rate down to 20%, and abolishing the 10% tax rate for lower earners. This would have forced more than 5m workers into the 20% tax bracket.

But in its latest U-turn, the Treasury will hand 20% taxpayers £120 by raising the starting point for paying tax by £600 to £6,035. Those in the next tax bracket will not benefit because their threshold will be reduce by £600 to £34,800.

Why move the thresholds?

Some consider it a cheap trick that allows the exchequer to collect more tax without changing the headline tax rates. Other allowances include the first £125,000 for stamp duty, £300,000 for inheritance tax, and £9,200 on capital gains tax.

Increasing the rate of income tax would be seen as a negative step. Instead the government used tax allowances as a backdoor method of achieving the same result.

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