The government’s decision to reduce the top rate of income tax from 50% to 45% from April 2013 attracted a lot of media attention. However, it is not the only change to the income tax system that is taking place. In fact, a much more wide-reaching change has been implemented at the bottom — from April 2014 people will pay no income tax on the first £10,000 that they earn, up from £6,475 when the coalition first came to office in 2010.
This reform will change the incentives to work. What is the likely effect of these changes on people’s working behaviour? In order to find the answer, we need to think about both the ‘marginal’ and the ‘average’ tax rates that people face, and how these will have been affected by the change in this ‘personal allowance’.
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