A key point has been hit in the campaign to force Chancellor Rachel Reeves to increase the ‘punitive’ income tax personal allowance from the current minimum of £12,570 to £20,000. A petition on the parliament website has soared in the last few days.
Last week it crossed the important 10,000 signatures which are needed for the Treasury to have to make an official response. Since then it has taken off and today it’s set to cross 50,000 signups meaning it is half way to forcing a Parliamentary debate on the issue.
Petition creator Alan Frost urged the Treasury to: “Raise the income tax personal allowance from £12,570 to £20,000. We think this would help low earners to get off benefits and allow pensioners a decent income. We think it is abhorrent to tax pensioners on their state pension when it is over the personal allowance. We also think raising the personal allowance would lift many low earners out of benefits and inject more cash into the economy creating growth.”
The £12,570 earnings threshold at which you start paying basic 20 per cent tax and the £50,270 40 per cent tax threshold have been frozen since 2021. This is expected to raise £1.2 billion for the Treasury by the time the freeze is set to end in 2028.
This phenomenon is called ‘fiscal drag’, as more taxpayers are ‘dragged’ into paying tax, or into paying tax at a higher rate and experts have said that the lower rate of £12,570 being frozen means some of the lowest paid in the country are disproportionately hit.
100,000 signatures on the petition will trigger a debate in Parliament about the current personal tax allowance policy. Consecutive governments have kept the allowance rates stagnant, making taxpayers shoulder an increasing tax burden.
The Office for Budget Responsibility has said that by 2025/26, due to these freezes, an extra 1.3 million individuals will pay tax, and a million will be bumped up to a higher tax rate. The founder of MoneySavingExpert.com, Martin Lewis, previously illustrated the trap: “Imagine someone who currently earns £12,000 now. Because earnings do tend to increase each year, in a couple of years’ time they’ll earn £13,000. But because the thresholds are frozen, they will now start to pay 20% tax on some of their earnings.”
He further explained how the freeze strategy is yielding revenue for the government: “And in fact, what freezing the threshold does is that it means no matter what you earn, as your earnings increase, a bigger proportion of your earnings goes on tax. And that’s how the Chancellor makes money from it.”
Last year’s Rachel Reeves budget confirmed that National Insurance and Income Tax thresholds across various regions would stay put till April 2028. Victor Bulmer-Thomas, writing on an LSE blog, previously said it was disproportionately imnpacting the poorest people: “The distributional impact of this particular stealth tax may come back to bite the administration that imposed it. The reason is that the impact is much more severe on those on lower incomes than those on higher ones.”
“At the end of the fiscal year 2021/22, the median pay of a full-time worker in the UK was £33,374 similar to the example of the individual I used above. The median pay of the bottom decile of full-time workers (the lowest ten per cent) was £20,691. Using all the same assumptions as above with regard to inflation, wage increases and applying the frozen Personal Tax Allowance, a “typical” individual in the lowest decile would see their tax bill increase from £1,624 to £2,906.”
“This is a jump in the average tax rate from 7.8 per cent to 10.7 per cent, which is an increase of 37.7 per cent. Furthermore, the basic rate of tax needed to secure the same amount of tax from this individual would have to be 27.7 per cent – a massive increase on the “official” rate of 20 per cent. No government would survive for long if it transparently imposed tax increases of this magnitude on the poorest in society.” To view and sign up for the petition click here.
Shaun Moore from the wealth manager Quilter said: “The tax trap between £100,000 and £125,140 is one of the most punishing thresholds in the system. While it is of course a nice problem to have, this is a problem that can stifle ambition as people look for ways to reduce their workload or turn down higher-paid roles for fear of finding themselves in the trap.”
Parents who get a pay rise that takes their salary above £100,000 could be even worse off. This is because once you earn more than £100,000 you also lose tax-free childcare and 15 of the 30 hours a week of free care that is available for three and four-year-olds.
To view and sign up for the petition click here.