Thursday 26 January 2012

Clegg's £10,000 personal allowance

What would it cost to bring in a £10,000 personal tax allowance in 2013-14?

It could be over £8bn.

(I'm leaving on one side the possibility of applying it from April 2012, though that is technically possible.)

The Institute for Fiscal Studies said bringing in the £10,000 threshold for tax from 2015 would have cost £4.1bn on top of the normal inflation increases in the allowances which would kick in over the years up until then.

The back of the envelope calculation from the IFS today is that the cost of early implementation could be double that.

The original calculation assumed that higher rate taxpayers would only be allowed to gain as much as standard rate taxpayers. (Just pushing up their personal allowance and not making any other changes would give them twice the gain.)

On the other hand, removing all potential benefit for higher rate taxpayers would take a billion off the 2015 cost, so perhaps £2bn off the 2013 cost.

The Chancellor has form with this tactic, having fiddled with the threshold for higher rate tax to make sure those in the 40% bracket didn't cash in unfairly on previous increases in the personal allowance.

The IFS says that 500,000 more people could be brought into higher rate tax if the £10,000 allowance was brought in with no benefit going to the better off.

Another quirk of this reform is that it cuts across the Chancellor's plan to remove Child Benefit from families with higher rate taxpayers.

Any family with a taxpayer drawn into the 40% bracket as a result of the £10,000 allowance would lose the benefit, saving the Treasury £200m a year -- according to the IFS.

Of course, how George Osborne would manage an early introduction of the £10,000 allowance remains a mystery.

We'll only find out whether he'll do it, when - and how he'll pay for it -- in the Budget.

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