Key facts
- The UK Chancellor is considering raising the personal tax-free allowance.
- The current personal allowance is £12,570.
- Proposals suggest increasing the allowance to £15,570.
- Economists estimate the cost of a £3,000 increase to be between £20 billion and £30 billion per year.
- Raising capital gains tax is being considered to fund the potential allowance increase.
The UK Chancellor is reportedly exploring a significant increase to the personal tax-free allowance, a move that could provide a substantial financial boost to millions of taxpayers. The proposal, championed by Labour donor Dale Vince, suggests raising the threshold at which individuals begin paying income tax and National Insurance from the current £12,570 to £15,570. This would effectively offer a £3,000 tax saving for those earning above the current limit.
However, the idea faces considerable skepticism from economists due to its potential cost. Estimates suggest that a £3,000 increase could cost the government between £20 billion and £30 billion annually. Experts like Nimesh Shah, CEO of Blick Rothenberg, deem the tax cut "unaffordable" given the current state of public finances, noting that funding it would require drastic cuts to essential budgets like schools or defense. Thomas Pugh, an economist at RSM UK, echoed these concerns, stating that the cost would be equivalent to a 3 percentage point increase in the basic rate of income tax or roughly half the projected increase in welfare spending.
Further complicating matters, Chancellor John Healey is under pressure to manage the UK's public finances, calm bond markets, and tackle high debt interest payments. He is also facing demands for increased spending on defense, social care, and housing, as well as potential support for households facing rising energy bills. Labour has pledged not to raise income tax, national insurance, or VAT, and Healey is committed to adhering to the government's fiscal rules. Economists like Robert Wood of Pantheon Macroeconomics argue that any new spending commitments or tax cut pledges would necessitate "implausibly large tax hikes" to maintain fiscal headroom.
As a potential funding mechanism, raising capital gains tax to align with the top income tax rate of 45% is being considered. This measure, also reportedly of interest to Prime Minister Rishi Sunak and Healey, could offset the cost of increasing the personal allowance. Other potential revenue-raising measures being discussed include a windfall tax on bank profits and an increase in machine gaming duty.