The tax allowance is the amount of money that a person can earn before they pay income tax on their earnings. In other words, this is tax free earnings. The tax allowance within this simulation is for both the basic rate (personal allowance) and the higher rate (higher rate threshold).

It is very difficult to speculate on the likely impacts on the individual due to the complexities of income and substitution effects. Empirical studies on the topic of labour market reform highlight that broad statements are very misleading within this area.

University students can apply their knowledge of indifference curve analysis to illustrate changes in individual's behaviour.

• The personal allowance is set at £4535 (you can earn £4535 as tax free income). The input parameters range between £1000 and £6000.
• The higher rate threshold is set at £29400 (you can earn £29400 before you start paying the higher income tax rate, i.e. 40%). The input parameters range between £20000 and £40000.

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