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Skip to 0 minutes and 1 secondGEORGE OSBORNE: Will not to transform the finances of any family. But it helps a little to have some bills that aren't going up. And it--

Skip to 0 minutes and 8 secondsSPEAKER 2: Order, order. Can I just say to the back row, and a couple of people in particular, that the pub tour season isn't for another nine months, and if auditions do take place, can they take place outside the chamber? [CHEERING] [INAUDIBLE]

Skip to 0 minutes and 25 secondsGEORGE OSBORNE: Mr. Deputy Speaker, it helps a lot to be able to keep more of the money you earn before you pay tax on it. This government supports people who work hard and want to get on. When we came to office, the personal income tax allowance stood at under 6,500 pounds. In two weeks' time, the allowance will reach 9,440 pounds, with the largest cash increase in its history. 24 million taxpayers will see their income tax bill cut by an extra 200 pounds. Over 2 million of the lowest paid will be taken out of tax altogether. In this budget, the government reconfirms its commitment to raising the personal allowance to 10,000 pounds. In fact, we go one better. Mr.

Skip to 1 minute and 12 secondsDeputy Speaker, we said we would raise the personal allowance to 10,000 pounds by the end of the parliament. Today I can confirm we will get there next year. [CHEERING] In 2014-- Mr. Deputy Speaker, from 2014 there will be no income tax at all on the first 10,000 pounds of your salary-- 10,000 pounds of tax-free earning. That's 700 pounds less in tax for working families than when this government came to office. Almost 3 million of the lowest paid will pay no income tax at all. It is a historic achievement for this government and for hardworking families across the country. Now, Mr. Deputy Speaker, I'm aware that the concept of a 10 pence tax rate has caused problems for honourable members opposite.

Skip to 2 minutes and 7 secondsFirst they introduced it, before deciding that introducing it was a mistake and it ought to be abolished. Then they decided that abolishing it was a mistake, and they ought to introduce it again. So to put them out of their misery, we're going to turn their 10 pence band into a 0 pence band, and they don't have to worry about it anymore. Every person who is paying a 10 pence rate that they doubled will now be paying no income tax at all. [CHEERING] Mr. Deputy Speaker, there is one final tax change I want to tell the House about, and it's about jobs.

Skip to 2 minutes and 44 secondsFor in the end, aspiration is about living in a country where people can get jobs and fulfil their dreams. The ending of contracting out that I talked about generates extra Employee National Insurance revenues for the Exchequer. And I want to put those revenues to good use. I want to support jobs and the small businesses that create them. And I want to do it with a reforming tax cut. In fact, it's the largest tax cut in this budget. The cost of employing people is a burden on small firms, and it's a real barrier to taking an extra person on. To help create jobs and back small businesses in this country, I am today creating the employment allowance.

Skip to 3 minutes and 23 secondsThe employment allowance will work by taking the first 2000 pounds off the Employer National Insurance bill of every company. It is a tax off jobs. It's worth up to 2000 pounds for every business in the country, and it will mean the 450,000 small businesses-- one third of all employers in the country-- will say no jobs tax at all. [CHEERING] For the person who's set up their own business, who's thinking about taking on their first employee, a huge barrier will be removed. They can hire someone on 22,000 pounds a year or four people on the minimum wage, and pay no jobs tax. 98% of the benefit of this employment allowance will go to SMEs.

Skip to 4 minutes and 16 secondsIt will become available in April, next year, once the legislation has passed. And we'll also make it available to charities and community sports clubs. The last government answer to Britain's economic problems was to propose a tax on jobs. We stop that, and today this government is taking tax off jobs. [CHEERING] Mr. Deputy Speaker, a new employment allowance that helps small firms, at 20% rate of corporation tax, a 10,000 pound person allowance-- major achievements delivered by this government in difficult times. We understand that the way to restore our economic prosperity is to energise the aspirations of the British people.

Skip to 5 minutes and 2 secondsIf you want to own your own home, if you want help with your child care bills, if you want to start your own business or give someone a job, if you want to save for your retirement and leave your home to your children, if you want to work hard and get on, we are on your side. This is a budget. This is a budget that doesn't duck our nation's problems. It confronts them head on. It's a budget for an aspiration nation. It's a budget that wants to be prosperous, solvent, and free. Thank you. Now I commend it to the House. [CHEERING]

Skip to 5 minutes and 41 secondsSPEAKER 2: Thank you. Order! Order!

Skip to 5 minutes and 49 secondsOrder. If we're going to make progress, you want to vote on it-- if you want this budget, we've got to put the vote. [LAUGHTER] Under the Standing Order Number 51, the first motion entitled Provision Collection of Taxes must be decided without debate. Will the chancellor of the Exchequer move formally? [CHEERING] Aye, aye. I think--

Taxing income

In the video, George Osborne, the then UK Chancellor of the Exchequer, announces his proposals for tax changes to a packed House of Commons.

Here we start to look in more detail at the deductions (for Income Tax and National Insurance in the UK) and additions (through benefit payments) that take us from gross to net income. (Note that for some people another possible deduction from gross income is contributions to their pension scheme: these schemes are discussed later in the course.)

Income Tax is levied on almost all types of income, including paid employment. When it is collected via an employer it is often referred to as a ‘pay as you earn’ (PAYE) tax. Income Tax is paid on income received within a given tax year, from 6 April of one year to 5 April of the following year. Income Tax is the single largest source of government revenue. In 2014/15, Her Majesty’s Revenue & Customs (HMRC) collected £163 billion in Income Tax – close to a third of all government receipts (HMRC, 2016).

In the UK Income Tax system, most people receive an ‘allowance’ of income that can be earned before Income Tax has to be paid. This ‘personal allowance’ is £11,000 in 2016/17 for someone born after 5 April 1948. The allowance is higher for certain groups of people, such as those who are registered blind. The personal allowance has an income limit of £100,000. Above this limit the allowance tapers away. Income above the personal allowance is then subject to tax at three different standard rates (Gov.UK, 2015):

  • in 2016/17 the first £32,000 (after the basic allowance has been taken into account) is taxed at 20%
  • above this figure and up to £150,000 of taxable income, the rate is 40%
  • there is an additional rate of 45% on taxable incomes over £150,000.

The personal allowance is scheduled to rise to £11,500 in 2017/18, with the Government’s ambition being an allowance of £12,500 by 2020.

Since 1999, Scotland has had some discretion over its income tax rates. These powers were extended in April 2016 and will be extended again in April 2017 giving the Scottish Parliament full discretion over the income tax rates and bands applied to non-savings income. To date, Scotland has not used these discretionary powers. Discretion over income tax is also planned to be extended to Wales and Northern Ireland.

By taxing additional income slices at higher rates, the proportion of tax increases with income. UK Income Tax is an example of progressive taxation, meaning that the proportion of a person’s income paid as tax increases as their income increases. This tax structure therefore helps to reduce income inequalities in the UK.

Next, have a go at using what you’ve learned here to try some calculations for yourself.

(Video © Contains Parliamentary information licensed under the Open Parliament Licence v1.0 (http://www.parliament.uk/site-information/copyright/open-parliament-licence/)Text © The Open University)

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This video is from the free online course:

Finance Fundamentals: Financial Planning and Budgeting

The Open University