If Andy Burnham wants to raise the allowance, it could cost a lot (Image: Getty)
A yo-yoing, will-he-won’t-he on a major tax pledge has threatened to overshadow new Prime Minister Andy Burnham’s first week as Prime Minister. Despite indicating before he took office that he wanted to raise the tax-free Personal Allowance – the amount of money workers can earn before paying tax on their income – the new premier has stepped back from making any hard promises, only confirming that the policy will be ‘looked at’ in the next Budget by new Chancellor John Healey.
The allowance has been frozen since 2021 under Rishi Sunak, and the freeze was then extended to 2031 by former Chancellor Rachel Reeves. The unpopular hold on the tax allowance means that more and more taxpayers are dragged into paying more tax – a problem known as ‘fiscal drag’ – as wages increase but allowances stay frozen. But an increase of just £500 a year would have drastic consequences for the UK, experts have warned.
According to Tax Policy Associates founder Dan Neidle, a rise in the allowance of that amount would cost the government an estimated £5Bn to implement.
Estimates by financial firm AJ Bell using OBR figures set out that should the tax-free Personal Allowance have been increased in line with inflation since 2021, and continue to be increased aligned with estimated inflation expectations, it would be set at £17,380 by 2030-31 tax year, the year the freeze is now due to end.
This represents an increase of £4,810, which at 20% tax rate would hand workers £962 a year back in tax relief. Put simply, that’s an extra £962 in everyone’s pocket, apart from the very high earners who no longer qualify for the tax-free Personal Allowance.
By the same metric, we assume a much larger £4,810 rise could cost a staggering £48Bn to put in place. Financial experts have told the Express that even finding £5Bn for a £500 increase would be extremely difficult, and pointed to various spending cuts that would be required in order to make it a reality.
Chris Beauchamp, Chief Analyst at IG, cautioned that a return to austerity would be a given, as well as severe cuts to welfare – and the death of the triple lock, the mechanism by which state pension payments are increased by at least 2.5% each April, and usually by more, to match inflation or wage growth.
He told the Express: “Such a move would require big thinking across government, and needs cuts to spending on a scale not contemplated since the austerity of David Cameron’s coalition government. It would need massive reform of the pensions system, including ditching the triple lock, far less generous welfare provision and even then other key departments would still need to find big savings. Whether bond markets would believe any of that could be achieved is the other huge question, to which I suspect the answer would be a big ‘no’”.
Dat Ngo, Certified Public Accountant at Vetted Prop Firms set out that NHS and frontline public services must not be cut in order to fund a rise.
He said: “For a £500 rise costing about £5 billion, I would first look at reducing higher income tax reliefs, cutting poorly targeted business subsidies, and improving government purchasing before reducing frontline services. Even then, I would question whether raising the Personal Allowance is the best use of the money.”
He, like other experts, pointed to a rise in National Insurance being a better and more cost effective option rather than raising the Personal Allowance.
Des Cooney, a professional retirement planner and Financial Consultant at Axis Financial Consultants, said that there are ‘very few options’ available to government other than delaying ‘large capital projects’.
He called for a review of all major programmes and projects before any such rise could be put in place.
He told the Express: “To put it into perspective, if the total cost of the policy is approximately £5 billion, before considering how to fund it, the government should review the current spending across all departments to ensure their programs are delivering what was originally intended. Many departments have programs that have continued for years simply because they have never been reassessed. A regular review process, including redirecting funding away from initiatives that no longer provide measurable value, would be a more prudent approach to managing departmental expenditure than reducing essential services.
“The real question is whether the country is committed to a level of tax reductions that successive governments will be able to maintain over the medium and long term. As with private sector financial planning, public sector finances require long term commitments to be matched with sustainable funding.
“Once taxpayers become accustomed to a higher personal allowance, returning to previous levels becomes increasingly difficult, even during periods of economic decline. That makes the initial decision far more significant than it first appears. Rather than asking whether the government can afford the policy today, the better question is whether it will still be affordable through the next recession, future population changes, and the next 10 years.”