Income tax and National Insurance

All income tax allowances will be increased in line with inflation. The personal allowance will increase to £5,225. The age-related personal allowances will rise to £7,550 for people aged between 65 and 74 and to £7,690 for those aged 75 and over. This will mean that in 2007-08 no one aged 65 or over need pay tax on an income of up to £145 a week. Around half of all pensioners pay no tax on their income.

In line with the Social Security Contributions and Benefits Act 1992, the lower earnings limit for employees' Class 1 national insurance contributions is to be raised to £87 a week. It is set at the level of the basic state pension for a single person from April 2007, rounded down to the nearest pound. This is the lowest level of earnings that can count towards entitlement to contributory benefits.

The primary and secondary thresholds for Class 1 contributions will increase in line with inflation to £100 a week, the same as the weekly amount of the income tax personal allowance. This means that employees and employers will pay no income tax or Class 1 contributions on earnings below this level.

The upper earnings limit for employee's Class 1 contributions will be raised to £670 a week, in line with inflation.

The flat rate of Class 2 contributions for the self-employed will increase to £2.20 a week. Those with earnings below the annual small earnings exception can apply to be exempted from paying Class 2 contributions; this limit will be raised to £4,635. The annual lower profits limit for Class 4 contributions will increase in line with inflation to £5,225.

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