Andy Burnham has been urged to raise the personal tax allowance to £15,000, with a tax expert saying there is a 'decision to be made' – including possibly increasing it just for pensioners.
Appearing on BBC Radio 4's Moneybox, Jonathan Cribb, deputy director at the Institute for Fiscal Studies (IFS), said in the long run there were two choices: increase the £12,570 level for everyone, or do it only for state pensioners. He added that if not, millions of people would face having to fill in tax returns.
Frozen threshold causes growing tax burden
The £12,570 threshold – the amount people can earn before paying 20% income tax – has been frozen since 2021 and will remain so until 2031 under current plans. This means more low earners are paying extra tax as inflation erodes the allowance's value.
Presenter Paul Lewis noted that the frozen personal tax threshold was the issue Burnham “heard most on the doorsteps” during his recent election campaign. Initially, Burnham suggested he wanted to change it, but later said: “There is no commitment at this point to change, but we will look at that at the Budget.”
Pensioners struggling on frozen allowance
The show spoke to shoppers in Warrington. One pensioner 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.”
Another 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]”
IFS expert outlines choices and costs
Cribb 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.’”
Lewis noted that people paid £23.8 billion in June – 13% up from a year earlier – due to the frozen personal tax threshold and the higher rate threshold at £50,570 (40% tax). Cribb said: “Unless you have an extremely low income you can’t avoid these tax rises.”
On pensioners, Cribb added: “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.”
Lewis pointed out that if the allowance had risen with inflation it would be £16,000. Cribb said allowing the £12,570 threshold to rise from now with inflation would cost the government £9 billion a year in tax. “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.”
Burnham said last week that the frozen income tax thresholds were the topic he “heard most on the doorsteps” while campaigning. He told reporters that “all of this will be looked at” in the next budget but acknowledged there would be “significant consequences” to lifting the threshold.
