The government has issued a response to a soaring petition calling for Chancellor Rachel Reeves to raise the amount people can earn before paying tax from £12,570 to of £45,000. The major campaign has seen more than 32,000 sign up to call for the ‘stealth tax’ to be ended.
Since the fiscal year 2021/22, a number of tax allowances in the UK have been “frozen”, meaning they have no longer been increased in line with the cost of living. Freezing tax thresholds increases people’s taxable income without tax rates actually increasing. This results in additional revenue to the government. This phenomenon is called ‘fiscal drag’, as more taxpayers are ‘dragged’ into paying tax, or into paying tax at a higher rate.
The petition’s creator, Denver Johnson said: “We think that the Personal Allowance, as termed by the government, has been kept unreasonably low for far too long, at the expense of the poorest, most needy people in our society. We feel that the poorer majority should pay substantially less than the wealthy. We think that the tax system seems designed to make the divide between rich and poor increase exponentially.”
As the petition on the parliamentary website got more than 10,000 signatures it was due a response which has now come from the Treasury. It said: “The Government has not extended the last Government’s freeze on personal tax thresholds, meaning from April 2028 working people will keep more of their earnings as thresholds will rise by inflation.
“The previous Government made the decision to freeze the income tax Personal Allowance (PA) at its current level of £12,570 until April 2028. The current Government is committed to keeping taxes for working people as low as possible while ensuring fiscal responsibility and so, at our first Budget, we decided not to extend the freeze on personal tax thresholds. As a result, they will rise with inflation from April 2028, meaning working people will keep more of their earnings.
“Increasing the Personal Allowance to £45,000 would come at a significant fiscal cost of more than £270 billion per annum on average over the next three years (based on HMRC’s ready reckoners, published here). This would reduce tax receipts substantially, decreasing funds available for the UK’s hospitals, schools, and other essential public services that we all rely on. It would also undermine the work the Chancellor has done to restore fiscal responsibility and economic stability, which are critical to getting our economy growing and keeping taxes, inflation, and mortgages as low as possible.
“The Government keeps all taxes under review as part of the policy making process. The Chancellor will announce any changes to the tax system at fiscal events in the usual way.”
At 100,000 signatures, the petition will be considered for debate in Parliament. Successive governments have frozen the personal tax allowance rates meaning people are sucked in to paying more tax. The Office for Budget Responsibility has published figures estimating freezes to the income tax personal allowance and higher-rate threshold for four years “will bring 1.3 million people into the tax system and create one million higher-rate taxpayers by 2025/26”.
MoneySavingExpert.com founder Martin Lewis has said: “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.
“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 the Rachel Reeves budget earlier this year the chancellor confirmed National Insurance thresholds across the UK and Income Tax thresholds in England, Wales and Northern Ireland would remain frozen until April 2028 – which is in line with what the previous Conservative Government said last year. There had been speculation that the new Labour Government would extend this ‘freeze’ further to 2030.
Victor Bulmer-Thomas, writing previously on a blog on the London School of Economics warned: “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.”