The chancellor has announced the personal tax-free allowance will increase to £10,800 next year and to £11,000 the year after.
Speaking earlier today (18 March) as part of this year’s Budget, George Osborne noted in two weeks time the personal tax-free allowance will reach £10,600 - having stood at just £6,500 when the coalition came into power five years ago.
He stated the increase to £11,000 means the typical working taxpayer will be more than £900 a year better off.
Mr Osborne said: “It is a tax cut for 27 million people and means we have taken almost four million of the lowest paid out of income tax altogether. Because we pass on the full gains of this policy, I can make this announcement today.”
Mr Osborne said the threshold at which people pay the higher tax rate will also increase from £42,385 this year - by £315 in 2016 to 2017 and by £600 in 2017 to 2018 - to £43,300 by 2017 to 2018.
He called this a down-payment on the government’s commitment to raise the personal allowance to £12,500 and raise the higher rate threshold to £50,000.
He said: “And in this Budget the rate of the new transferable tax allowance for married couples will rise to £1,100 too.”
From April 2016 the government is also introducing a tax-free personal savings allowance of £1,000 (or £500 for higher rate taxpayers) on the interest that earned on savings.
To be eligible for the £1,000 tax-free personal savings allowance, taxable income needs to be less than £42,700 a year, while to be eligible for the higher rate £500 tax-free allowance, taxable income needs to be between £42,701 and £150,000 a year.
Also from April 2016 banks and building societies will have to stop automatically taking 20 per cent in income tax from the interest earned on non-Isa savings.
Helen Bierton, head of savings at Santander, welcomed the changes which she said will encourage more people to save and will also help many first-time buyers onto the property ladder. “We will work with the government to help deliver these changes for our customers.”
Sylvia Waycot, editor at Moneyfacts.co.uk, said: “We finally have one rule that gives all savers equal opportunities and addresses the unfairness of having to pay tax on money that has already had a share taken by the taxman.”