A £12,500 personal allowance: a primer

Raising the personal allowance has been a key fiscal policy objective of the coalition. David Cameron has just announced a future Conservative Government would raise it from £10,500 (to be introduced in 2015-16) to £12,500. What might this cost, who will benefit, and who is it targeted at?

The cost:

Here are some very rough back of the envelope calculations. When, in Budget 2014, the Coalition announced the raise to £10,500 (from, assume, £10,000), this was forecast to cost an average of £1.75bn pa over each of the next four years. Multiply that by, roughly, four (if 500 costs £1.75b than 2000 all things being equal will cost four times as much) gives you £7bn pa - but of course you then have to factor in the fact that as the personal allowance increases the number of people able to take advantage of that increase declines (because they earn less than the increased allowance). About (these percentage figures only cover people with some liability to income tax) 11% of people earn below £10,500 and about 21% below £12,500. And that fact is a rather telling one - I'll come back to it.

Who benefits:

The first thing to note is that it only benefit those earning more than £10,500.

If you work part-time, or you're self-employed, or you work on a zero-hours contract you may well benefit not at all. Self-evidently, if you don't have taxable earnings - because for example you're reliant on benefits - the increase will do nothing for you.

What about those on the minimum wage? £6.50 per hour x a 35 hour week gives you a weekly taxable income of £227.50 or an annual income of £11,830. So if you earn minimum wage, you'll benefit. Somewhat. To the tune of £266 per annum post tax. Those earning the median wage (something around £520 pw), on the other hand, will benefit by £400 pa. (These figures assume that there are not corresponding rises in national insurance contributions thresholds - although past practice suggests there will be).

Who is it targeted at?

The short answer is, not the lowest paid. If you wanted to help only those earning minimum wage, you could certainly do so an awful lot more cheaply and an awful lot more generously than by this measure (which is likely, depending on the detail, to benefit everyone earning below £100,000).

Remember that when you hear a politician say, in response to the question: 'What have you done to lift people out of poverty?' the answer 'I raised the personal allowance to £12,500 and took a whole bunch of people out of personal income tax'.