Andy Burnham's tax unfreeze plan has sparked a lot of interest, and for good reason. As the new prime minister, his top priority is tackling the cost of living crisis, and one of the key options on the table is lifting the personal allowance threshold. But what does this mean for taxpayers and the Treasury? Let's take a closer look.
The Personal Allowance: A Brief History
The personal allowance is the amount of income a person can receive annually before starting to pay tax on earnings. It has been frozen at £12,570 for five years, and tax band thresholds have similarly been stuck at the same level rather than rising with wages. This has resulted in more people being pulled into either paying tax for the first time or paying a higher tax bracket, due to the process known as fiscal drag.
The Options for Burnham
If Burnham lifts the personal allowance, it would give a small amount of breathing space to basic rate taxpayers in particular. The question is, how much should it be lifted by? One option is to use the CPI inflation figure, which would uplift the personal allowance by around £480. Alternatively, Burnham could lift it in line with the state pension triple lock policy, which would yield a slightly bigger boost.
The Impact on Taxpayers
For a basic UK average salary of £35,000, lifting the personal allowance by £480 would mean a taxable income of £21,950, taxed at 20% - or £4,390. This would save the employee around £96 per year, plus an additional £38.40 per year if National Insurance is similarly uplifted. While these figures may not be life-changing for most workers, any additional untaxed income would likely be welcomed at this stage.
The Cost to the Treasury
However, the cost to the Treasury could be significant. According to HMRC Ready Reckoner numbers, the loss of tax take could amount to anywhere between £4.5bn and £5.5bn annually. This has led some to question whether this is a 'bad tax cut' that saves only around £100 a year for a basic rate taxpayer, versus a £5bn cost to the Treasury. In comparison, a 1p employee National Insurance cut would cost the same but save the average worker £250 a year.
The Broader Implications
The implications of Burnham's tax unfreeze plan go beyond the immediate impact on taxpayers and the Treasury. For example, if Burnham breaks with tradition and goes the triple lock rule as a one-off, the personal allowance would rise 4.1% due to 2025 wage growth figures. This would yield a £104 saving to our basic taxpayer example, or £145.60 in total including NI. However, this could also mean a structural shift in taxation, with Burnham hinting at replacing council tax with an annual property tax.
Conclusion
In conclusion, Andy Burnham's tax unfreeze plan has the potential to provide much-needed breathing space for basic rate taxpayers. However, the cost to the Treasury could be significant, and the broader implications of the plan are still unclear. As Burnham continues to develop his policies, it will be interesting to see how he navigates the delicate balance between providing relief to taxpayers and maintaining fiscal responsibility.
