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David Cameron has announced two big tax changes this lunchtime: he is raising the amount of money you don’t have to pay tax on (the tax-free allowance) from £10,000 to £12,500, and increasing the amount you can earn before you have to pay the 40p rate of tax.
Under the current system you don’t have to pay 40 pence in the pound on your earnings until you reach nearly £42,000 (the rate doesn’t kick in until £31,865 above the £10,000 tax-free allowance). The overall threshold will now increase to £50,000.
But how much will these two measures cost? Many figures are flying around. On the BBC’s Daily Politics shortly after the speech, Michael Gove, the Chief Whip, said raising the allowance would cost £5bn, and the 40p rate change another £2bn. Andrew Neil suggested the real figures are closer to £8bn and £3.5bn.
The Tory press office are unwilling to take calls on the subject, but took to Twitter to effectively confirm Gove’s numbers – the changes will cost £7.2bn in total.
Paul Johnson, director of the Institute of the Fiscal Studies and point-man for such debates, then endorsed these figures on The World At One.
Earlier this year his institute published a report on the more expensive, tax-free part of Cameron’s plans. They suggested the move would cost “around £5bn per year in 2014-15 prices” if the rate was raised to £12,500 by April 2020, but much more if the move was more immediate.
“A £2,500 additional increase to the personal allowance in April 2014 would cost around £12 billion per year relative to current plans.”
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