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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 2017/18 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 £33,500. ‘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 2016/17.

The personal allowance is increased by £500 to £11,500 for 2017/18. The basic rate limit is increased by £1,500, so that the higher rate threshold – the point at which individuals become liable to pay tax at the higher rate – is set at £45,000 for 2017/18.

In the 2012 Budget the Coalition 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 Both allowances have now been overtaken by the personal allowance and have been withdrawn.

In the 2015 Budget the Coalition 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 may transfer this unused fraction to their spouse or civil partner, up to a set amount. Individuals cannot make use of this provision if their spouse or partner pays more than the basic rate of tax. For 2017/18 the maximum that can be transferred is £1,150.

The rates of National Insurance contributions (NICs) for both employees and employers are unchanged for 2017/18.  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 set at £157 per week for 2017/18.  The upper earnings limit is increased to £866 per week for 2017/18, so that it remains aligned with the income tax 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 2017/18 year are set out in Annex A to HM Treasury, Overview of Tax Legislation and Rates, March 2017, which was published alongside the 2017 Budget report.

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