Contribution
I beg to move,
That this House has considered e-petition 702844 relating to the Income Tax Personal Allowance.
It is a pleasure to serve with you in the Chair, Mr Stuart, and it is a privilege to open the debate as a member of the Petitions Committee.
All colleagues from all parties will recognise the priority that the public place on improving living standards, as our conversations with constituents, polling and the facts of the matter tell us. The reality is that average disposable incomes after tax fell from 2019-20 to 2023-24 —an unprecedented and shocking situation in which people were left poorer at the end of the last Parliament than they were at the start of it. That is the key context for today’s debate, which has been triggered as a result of more than 250,000 citizens signing the petition on income tax personal allowances. It also speaks to wider and entirely understandable public frustration about living standards.
In preparation for the debate, I had the pleasure of talking to Mr Alan Frost, the creator of the petition and a constituent of the hon. Member for Bridgwater (Sir Ashley Fox). Mr Frost, who is in the Gallery, explained that he has recently retired, having worked his whole life. He feels a sense of injustice that his state pension is considered as income for tax purposes, and that the tax thresholds he faces are not increasing.
The events that led to that situation are as follows. In the 2021 spring Budget, the right hon. Member for Richmond and Northallerton (Rishi Sunak), who was Chancellor at the time, announced that the income tax personal allowance threshold of £12,570 would be frozen until April 2026. In the 2022 autumn statement, the Chancellor at that time, the right hon. Member for Godalming and Ash (Sir Jeremy Hunt), announced that the freeze would be extended for a further two years until April 2028. Following the change of Government, the current Chancellor announced in her autumn 2024 Budget that the freeze would not be extended any further, and therefore income tax personal allowances are expected to next rise in April 2028.
Although Mr Frost is a pensioner and his petition reflects a desire to boost pensioner incomes, he also believes that significantly increasing the personal tax allowance would benefit those in work, boosting incomes and reducing the need for benefits. That belief reflects the reality that less than a quarter of the 37 million income tax payers in the UK are over the age of 65. The vast majority of those paying income tax are of working age and are not receiving the state pension.
In their written response to the petitioners, the Government highlighted that making the suggested changes to the personal allowance would cost “many billions of pounds”. I am sure that the Minister will say more about that when he responds, but cost is a key element to discuss in our debate. It is Parliament’s responsibility to agree the ways and means of any policy it makes—that is, how to pay for what we decide to do.
I gently suggest that the events of the last Parliament remind us how serious that responsibility is. The mini-Budget of September 2022 announced tax cuts costing around £45 billion without explaining how they would be funded, and the market reaction to that announcement left ordinary people paying the price. An emergency reversal of those tax changes followed, but not before high inflation and interest rates hit the standard of living. I therefore urge our debate to be conducted in full consideration of the cost and funding of any tax policy changes.
Were income tax personal allowances to rise in the way suggested by the petition, there would be several other linked tax policy choices to be made, and those choices would determine the full cost of the change. For example, would the size of the tax bands above the personal allowance be maintained? Currently, the basic rate of 20% is levied above the personal allowance and up to about £50,000 of income. Would the size of that band be maintained if the personal allowance were increased by £7,500? If so, the point at which the higher rate of tax takes effect would, in turn, increase to almost £58,000, at further cost to the Exchequer.
Similarly, the additional rate of tax is currently levied on incomes above £125,000, so if the personal allowance was to rise, would that level rise proportionately too? Finally, the income tax personal allowance is aligned with the level at which people start making national insurance contributions; should that level also rise to £20,000, or would we return to a more complicated tax system in which income tax and national insurance thresholds were no longer harmonised?