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Income tax on earned income is charged at three rates: the basic rate, the higher rate and the additional rate.  For 2016/17 these three rates are 20%, 40% and 45% respectively.  Tax is charged on taxable income at the basic rate up to the basic rate limit, set at £32,000. ‘Taxable income’ excludes personal allowances, which represent the amount of money someone may receive free of tax. Tax is charged at the higher rate on taxable income between the basic rate limit and the higher rate limit, set at £150,000. The additional rate is charged on taxable income over £150,000. All three tax rates are unchanged from 2015/16.

The personal allowance is increased by £400 to £11,000 for 2016/17. The basic rate limit is increased by £215, so that the higher rate threshold – the point at which individuals become liable to pay tax at the higher rate – rises to £43,000.

In the 2012 Budget the Government announced it would phase out the two age-related personal allowances, claimed by individuals aged 65-74, and those aged 75 and over. From April 2013 these allowances would be frozen – at £10,500 and £10,660 respectively – until they became aligned with the personal allowance. In addition, only existing recipients would be entitled to claim either allowance. Both allowances have now been overtaken by the personal allowance.

In the 2015 Budget the Government confirmed the introduction of a new marriage allowance. From April 2015 individuals whose income is insufficient to make full use of their personal allowance have been entitled to transfer this unused fraction to their spouse or civil partner, up to a set amount. Individuals cannot make use of this allowance if their spouse or partner pays more than the basic rate of tax. For 2016/17 the maximum that can be transferred is £1,100.

All married couples used to be entitled to claim the married couple’s allowance, which was withdrawn from April 2000 for all couples under 65 at that time. Taxpayers may still make a claim, if one or both partners were born on or before 5 April 1935.  For 2016/17 this allowance is set at £8,355. The allowance is ‘restricted’ to 10 per cent; in effect, taxpayers receive a credit worth 10% of the married couple’s allowance to set against their final tax bill.

The rates of National Insurance contributions (NICs) for both employees and employers are unchanged for 2016/17.  For employees, the rate of NICs is set at 12% on all earnings between the primary threshold and the upper earnings limit, and at 2% on earnings above the upper earnings limit.  For employers, the rate of NICs is set at 13.8% on earnings above the secondary threshold.  Both the primary and secondary thresholds are unchanged, set at £155 & £156 per week, respectively.  The upper earnings limit is increased to £827 per week for 2016/17, so that it remains aligned with the higher rate threshold.

This paper deals only with tax allowances and ‘wasteable’ tax credits: those which are limited to the amount of the tax liability and therefore cannot give rise to a payment by the authorities to the taxpayer.  Details of ‘non-wasteable’ tax credits – such as the child tax credit and the working tax credit – along with other tax rates and allowances for the 2016/17 year are set out in Annex B to HM Treasury, Overview of Tax Legislation and Rates, March 2016, which was published alongside the 2016 Budget report.

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