A campaign calling for an increase in the income tax personal allowance from the standard £12,570 to £20,000 has hit an important milestone. A petition hosted on the Parliament UK website has soared beyond 10,000 signatures, which means it will need a response from the government.
Alan Frost, who initiated the petition which now displays more than 18,000 supporters, urges HMRC 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.”
Since the fiscal year 2021/22, several UK tax allowances have been “frozen”, meaning they no longer rise in line with the cost of living. This freezing of tax thresholds increases people’s taxable income without an actual increase in tax rates, thereby generating additional revenue for the government.
This effect is known as ‘fiscal drag’, as more taxpayers are ‘dragged’ into paying tax or paying at a higher rate. If the petition reaches 100,000 signatures, it will prompt a parliamentary debate regarding the current personal tax allowance policy.
Successive governments have maintained stagnant allowance rates, subtly pushing taxpayers to bear an increasing tax load. The Office for Budget Responsibility highlighted forecasts indicating that by the 2025/26 financial year, due to ongoing freezes, an additional 1.3 million people will find themselves within the tax bracket, and a million more will be pushed into higher tax rates, reports Nottinghamshire Live.
MoneySavingExpert.com founder Martin Lewis laid bare the stark situation: “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 per cent tax on some of their earnings.”
Lewis has also shed light on how this threshold freeze covertly fills government coffers: “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.”
In last year’s budget announcement by Rachel Reeves, it was confirmed that National Insurance and Income Tax thresholds would remain unchanged until April 2028 across various regions. Commenting on an LSE blog, academic Victor Bulmer-Thomas highlighted the disproportionate effect on the poorest individuals: “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.”
He further detailed the financial strain on low-income earners: “At the close of the fiscal year 2021/22, the median salary for a full-time worker in the UK was £33,374, akin to the example of the individual I previously mentioned. The median pay for the bottom decile of full-time workers (the lowest ten per cent) stood at £20,691. If we apply the same assumptions as before regarding inflation, wage increases and the frozen Personal Tax Allowance, a ‘typical’ individual in the lowest decile would see their tax bill rise from £1,624 to £2,906.”
“This equates to an increase in the average tax rate from 7.8 per cent to 10.7 per cent, marking an increase of 37.7 per cent. Moreover, to secure the same amount of tax from this individual, the basic tax rate would need to be 27.7 per cent – a significant leap from the ‘official’ rate of 20 per cent. No government could sustain itself if it openly imposed such substantial tax hikes on society’s poorest.”