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Could tax allowance be Osborne's magic bullet?

George Osbourne will announce his budget on Wednesday. Photo: Press Association

At the very heart of the budget lies a complex mix of coalition politics and financial engineering.

It is the "personal tax allowance", put simply: what you can get paid without paying income tax.

It looks like Osborne's magic bullet because it would benefit all tax payers.

In May 2010 the threshold was lifted from £6,475 to £7,475. A further increase of £630 has already been announced for this year, which would bring the new threshold to £8,105. Supporters of the move point out that it means a total of 1.1 million people will pay no income tax at all. Millions of other basic rate pay taxpayers will pay £700 less in tax each year, that's around £60 a month.

Lib Dems see the threshold shift as a central plank in their efforts to ensure the lower paid get help - their aim is to bring the threshold up to £10,000.

Delve a little deeper and its not as simple as it first seems. For one thing around a third of the lowest paid adults in Britain already pay no tax. The increased threshold favours households with more than one earner (because each individual gets the tax-free personal allowance) so the very poorest single parents are not targeted.

On top of that there are studies suggesting wealthier tax payers will gain more from the raising of thresholds. For example, The Institute of Fiscal Studies concluded: "The highest average cash gain occurs in the second-richest tenth of the income distribution".

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