Direct taxes: rates and allowances 2013/14

Income tax on earned income is charged at three rates: the basic rate, the higher rate and the additional rate. For 2013/14 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 £32,010. 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, which is set at £150,000. The additional rate is charged on taxable income over £150,000. While the basic and higher rates of tax are changed, the additional rate is cut from 50% to 45% from April 2013.

The personal allowance is increased by £1,335 to £9,440 for 2013/14. The basic rate limit is cut by £2,360, reducing the higher rate threshold – the point at which individuals become liable to pay tax at the higher rate. The cut in the higher rate threshold reduces the tax saving for higher rate taxpayers from the increase in the personal allowance.

The two age-related personal allowances for older people are frozen in cash terms: at £10,500 and £10,660, following the decision in the 2012 Budget to phase out both allowances. From April 2013 only existing recipients are entitled to claim either allowance, so that for 2013/14 individuals must be between 66 and 75 years old to claim the first allowance of £10,500. Similarly individuals must be aged 76 or over to claim the higher allowance of £10,660.

The rates of National Insurance contributions (NICs) for both employees and employers are unchanged for 2013/14. 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 increased in line with inflation: these thresholds are set at £149 and £148 respectively. The upper earnings limit is cut to £797 for 2013/14, so that it remains aligned with the higher rate threshold.