Andy Burnham was told by one pensioner that she was desperate for the lowest tax threshold to be rai (Image: Christopher Furlong/PA Wire)
Andy Burnham has been urged to raise the personal tax allowance to £15,000 by one pensioner, as a tax expert declared there is a ‘decision to be made’ — with one potential option being an increase exclusively for pensioners. Speaking on BBC Radio 4’s Moneybox programme, Jonathan Cribb, deputy director at the Institute for Fiscal Studies, outlined two long-term options: raising the £12,570 threshold for all earners, or limiting the increase solely to state pensioners.
He further warned that without action, millions of people could find themselves obliged to complete self-assessment tax returns. The £12,570 threshold has remained frozen since 2021, resulting in a growing number of the lowest-paid workers being dragged into paying additional tax.
The figure represents the amount individuals can earn before becoming liable for tax at 20 per cent, and under current proposals, it will remain unchanged until 2031.
Presenter Paul Lewis noted the issue was one that new Prime Minister Andy Burnham had repeatedly encountered while campaigning, and suggested he had initially indicated a desire to address it. Mr Lewis said: “What about that major issue on the doorstep identified by the new Prime Minister, Andy Burnham, when he was campaigning to be elected to parliament in his new constituency of Makerfield. The issue, he said, was mentioned more than any other – the frozen personal tax threshold – that’s the point, of course, at which income tax begins. It’s been stuck at £12,570 a year since 2021 despite a law which says it should rise each year with inflation.
“Late on Wednesday the Prime Minister said that there is no commitment at this point to change, but we will look at that at the Budget.”
The threshold at which point people start paying income tax is currently £12,570 – it’s been frozen there since 2021. Thanks to higher inflation pushing up wages but not the thresholds, more people have been dragged into paying higher rates of tax.
There are 31.4 million basic-rate taxpayers in the country, according to the latest HMRC figures. That’s a 15% increase in the number of people paying income tax at 20% since tax bands were frozen at 2021 levels.
A total of 7.7 million people are expected to pay the higher rate this year – a million more than two years ago. A further 1.3 million people are set to pay the 45% additional rate – far more than the 263,000 people paying it in 2010-11 when it was first introduced.
If the threshold had risen in line with inflation, it would be about £16,072 next year and £17,380 by 2029-30, according to analysis by AJ Bell. If Burnham were to increase the personal allowance to £16,000, it would cost around £35bn, the investment platform said. Raising the allowance by just £100 would cost roughly £1bn a year.
The programme spoke to shoppers in Warrington who emphasised stagnant wages resulting from the tax freeze. One said: “I’m currently in the situation where I was looking to drawdown on my pension because I’ve been looking after my parents being their main carers for some time and now they’ve both passed away. I thought – oh maybe I’d get a little job but this little job, what was a 20-hour contract of course that’s creeping me over what I can earn in the year in terms of tax and National Insurance so I would be delighted [if Burnham raises the tax threshold]”.
One said: “I can’t manage on the amount that I get with my teacher’s pension, which is very small, and the old age pension, the state pension, and I’m really struggling with that. It seems that every time either of the pensions goes up, the amount I actually receive goes down. So I’m literally getting poorer and poorer, and the result of that is that I’m struggling on an income which is barely more than £12,500 a year. The only way I can manage is by being miserably frugal. What I would love for the threshold to even be raised to £15,000 a year – actually I would be delighted. That would help me and many of my friends and millions like us.”
Jonathan Cribb, deputy director at the Institute for Fiscal Studies, acknowledged that when the measure was introduced in 2021 the ramifications were not fully understood, ‘but they certainly seem to now’. He said: “I’m not surprised. At the beginning it doesn’t seem like so much, inflation erodes the value of that allowance, but as we go on the difference between what it is and what it would have been if these tax rises hadn’t happened gets bigger and bigger, and people are now looking ahead at another four years of these frozen tax thresholds and thinking ‘well that’s a considerable increase in tax that I’m paying.”
Mr Lewis revealed that taxpayers handed over £23.8 billion in June — 13 per cent more than the previous year — attributable to the personal tax threshold, as well as the higher rate threshold of £50,570 at which individuals are liable to pay 40%. Mr Cribb warned: “Unless you have an extremely low income you can’t avoid these tax rises.”
Addressing the matter of pensioners, Mr Cribb commented: “Pensioners are going to be struggling with the cost of living just as people of working age. On average pensioners pay slightly less tax on their income that working age people because of not paying National Insurance. I think what’s really obvious here is the lack of growth in earnings of people’s pensions is really becoming very starkly obvious to people particularly in the context of these frozen tax thresholds.”
Mr Lewis stated the matter will become serious next April because the state pension will be higher than the £12,570 lowest tax thresholds, which is the ‘ultimate giving with one hand and taking with the other isn’t it’. Mr Cribb said: “It is. The state pension’s always been taxable but it’s clearly very salient to people for those just reliant on that, that they’re going to be paying income tax. The Chancellor has confirmed what Rachel Reeves’ policy was that they won’t be paying tax in this parliament,. In part that’s a technical thing so that millions of people don’t have to suddenly start some form of tax return. In the longer run there’s a decision needs to be made – are the government going to increase the personal allowance – start increasing it – either for the whole population or going back to what we had a long time ago which was a higher personal allowance for pensioners.”
Mr Lewis noted that had it increased in line with inflation, the tax allowance would stand at £16,000. Mr Cribb explained that if the government permitted the personal tax allowance of £12,570 to rise from this point onwards with inflation, it would cost the Treasury £9 billion in tax revenue annually.
“If they want to do that to allow the personal allowance to grow again they’ll need to cut spending elsewhere or raise some other taxes.”
Listen to the full Radio 4 show here.