Welcome to UK Immigration Navigator, in this article we are going to cover “UK Personal Tax Allowance: Will it Rise to £45,000?”
UK Personal Tax Allowance raises the tax-free earnings threshold
The UK’s tax landscape is currently under scrutiny, with a groundswell of public discontent over the “frozen” personal tax allowance. A significant petition, gaining traction with over 32,000 signatures, is demanding that Chancellor Rachel Reeves raise the tax-free earnings threshold from the current £12,570 to a much more substantial £45,000. This isn’t just a random figure; it’s a response to the perceived ‘stealth tax’ created by years of static allowances, which many feel are unfairly impacting the working population, particularly those on lower incomes. This article explores the key issues of this campaign, the government’s response, and the implications for UK taxpayers.
The “Stealth Tax”: How Fiscal Drag Impacts You
The heart of this debate lies in the concept of “fiscal drag.” Since the 2021/22 fiscal year, the UK government has frozen various tax allowances, including the personal tax allowance. In simple terms, this means that while wages may rise with inflation or due to career progression, the tax-free portion of your income remains stagnant. This effectively pushes more of your income into taxable territory.
This is not the result of increasing tax rates, it is the tax-free allowance threshold remaining stagnant, making more of your earnings taxable. It is this that campaigners describe as a “stealth tax” as without any change to the tax rate the government takes more tax through the process of “fiscal drag” This is made worse if your income increases, even if that increase is in line with inflation, pushing more of your earnings to be taxed, or into higher tax brackets.
Contents Overview
Martin Lewis of MoneySavingExpert.com has explained this clearly, if an individual’s earnings increase from £12,000 to £13,000, because the threshold remains frozen, they will start paying 20% tax on some of their earnings. This, he points out, means that as earnings rise a bigger proportion is claimed by tax, benefiting the chancellor.
The £45,000 Petition and Its Demands
The petition, spearheaded by Denver Johnson, highlights a deep-seated feeling that the current personal allowance is “unreasonably low,” particularly impacting the poorest in society. The central aim is to drastically reduce the tax burden on low to medium earners, which the campaign claims is disproportionate in comparison to higher earners. It is a demand for a tax system that campaigners believe will decrease the divide between the rich and poor rather than increase it.
Government’s Response: Fiscal Responsibility vs. Tax Relief
The Treasury, in its response to the petition, acknowledges the public concern but underscores the financial implications of such a radical change. Raising the Personal Allowance to £45,000 would, according to the government, result in a “significant fiscal cost” of over £270 billion annually for the next three years. They are arguing that this would not only drastically reduce tax revenue but severely impact funding for public services such as healthcare and education. The government also argues that it would undo the work the current chancellor has done to restore economic stability.
The government has stated they are committed to low taxes for working people but within a framework of fiscal responsibility. They stress that the freeze will not be extended and that tax thresholds will rise with inflation from April 2028. This, they claim, will mean working people will retain more of their earnings.
The OBR Data and the Growing Taxpayer Base
Data from the Office for Budget Responsibility (OBR) supports the concerns raised by the petition. Their figures indicate that the ongoing freeze on income tax allowances will bring an additional 1.3 million people into the tax system by 2025/26, with a million becoming higher-rate taxpayers. This data confirms the reality of “fiscal drag” and the significant impact of static tax thresholds.
The Impact on Lower-Income Earners
Victor Bulmer-Thomas of the London School of Economics has warned that the “stealth tax” has a “much more severe” impact on lower incomes. He highlights the case of a typical individual in the lowest decile (the lowest ten percent of earners). Assuming inflation and normal wage increases, their tax bill will rise from £1,624 to £2,906, a jump in the average tax rate from 7.8% to 10.7% – an increase of 37.7%. To match this additional income without a change in the tax rate, the official tax rate would have to be 27.7% for those on the lowest incomes.
Labour Government Stance
The current Labour Government has, in the budget earlier this year, reaffirmed the previous Conservative Government’s decision to keep National Insurance and Income Tax thresholds frozen until April 2028, rather than pushing the freeze out further to 2030 as had been rumored. This indicates there is very little political appetite for a change to tax allowance in the short term.
The Potential for Parliamentary Debate
The petition has already triggered a government response due to surpassing 10,000 signatures, and should it reach 100,000 signatures, it could lead to a debate in Parliament. This would mean the issue of the frozen tax allowance would become a matter of national political debate.
Conclusion
The debate over the UK’s personal tax allowance is a complex issue with significant implications for individuals and the government. While the demand to raise the threshold to £45,000 reflects real concerns about the impact of fiscal drag, the government argues this would undermine budgetary responsibility.
The government is trying to balance the need to keep taxes low for working people while at the same time funding public services. Ultimately, this is a tightrope between raising revenue and managing the cost of living. The government’s recent budget has reaffirmed the freeze on personal tax allowance until 2028. Therefore we can expect the debate about tax thresholds to continue for some time. The outcome will shape the UK’s economic landscape for years to come.
FAQ
Q: What is the personal tax allowance?
A: The personal tax allowance is the amount of money you can earn each year before you start paying income tax. In the UK, the current personal allowance is £12,570.
Q: What is “fiscal drag”?
A: Fiscal drag occurs when tax thresholds remain static while wages and inflation rise. This pushes more of your income into taxable brackets, effectively increasing your tax burden without a rise in the tax rate.
Q: Why are people campaigning to raise the personal tax allowance to £45,000?
A: Campaigners believe the current personal allowance is too low and disproportionately impacts lower-income individuals. They argue that raising the threshold to £45,000 would reduce the tax burden on those most affected by the current system.
Q: What has the government said about this?
A: The government acknowledges the concern but states that raising the personal allowance to £45,000 would be unaffordable, costing £270 billion each year, negatively impacting funding for public services. They have said that the freeze on tax thresholds will not be extended and that they will rise with inflation from 2028.
Q: What is the OBR’s view?
A: The Office for Budget Responsibility has stated that the freeze on income tax thresholds will bring 1.3 million more into the tax system by 2025/26, with one million becoming higher-rate taxpayers.
Q: What happens if the petition reaches 100,000 signatures?
A: A petition that surpasses 100,000 signatures can be considered for debate in Parliament, bringing the issue to national political attention.
