A surging petition demanding Chancellor Rachel Reeves to hike the tax-free earnings threshold from £12,570 to a whopping £45,000 has elicited a government response. The campaign, which has garnered upwards of 32,000 signatures, is calling for an end to what’s been dubbed a ‘stealth tax’.
Since the fiscal year 2021/22, several UK tax allowances have been “frozen”, halting their increase in line with living costs. This freeze effectively raises individuals’ taxable income without a rise in tax rates, thereby swelling government coffers through what’s known as ‘fiscal drag’, pulling more taxpayers into higher tax brackets.
The mastermind behind the petition, Denver Johnson, expressed his concerns: “We think that the Personal Allowance, as termed by the government, has been kept unreasonably low for far too long, at the expense of the poorest, most needy people in our society. We feel that the poorer majority should pay substantially less than the wealthy. We think that the tax system seems designed to make the divide between rich and poor increase exponentially.”
Having surpassed 10,000 signatures, the petition on the parliamentary website was entitled to a response, which the Treasury has now provided. They stated: “The Government has not extended the last Government’s freeze on personal tax thresholds, meaning from April 2028 working people will keep more of their earnings as threhttps://www.gov.uk/government/statistics/direct-effects-of-illustrative-tax-changessholds will rise by inflation.”
“The previous Government made the decision to freeze the income tax Personal Allowance (PA) at its current level of £12,570 until April 2028. The current Government is committed to keeping taxes for working people as low as possible while ensuring fiscal responsibility and so, at our first Budget, we decided not to extend the freeze on personal tax thresholds. As a result, they will rise with inflation from April 2028, meaning working people will keep more of their earnings.”
“Increasing the Personal Allowance to £45,000 would come at a significant fiscal cost of more than £270 billion per annum on average over the next three years (based on HMRC‘s ready reckoners, published here). This would reduce tax receipts substantially, decreasing funds available for the UK’s hospitals, schools, and other essential public services that we all rely on. It would also undermine the work the Chancellor has done to restore fiscal responsibility and economic stability, which are critical to getting our economy growing and keeping taxes, inflation, and mortgages as low as possible.”
“The Government keeps all taxes under review as part of the policy making process. The Chancellor will announce any changes to the tax system at fiscal events in the usual way.”
Reaching 100,000 signatures could make a petition subject for parliamentary debate amidst concerns that people are increasingly drawn into higher tax brackets. Successive governments have kept personal tax allowance rates static, inevitably resulting in taxpayers shelling out more.
The Office for Budget Responsibility has released data indicating that the ongoing freeze on income tax personal allowance and higher-rate threshold will bring an additional 1.3 million people into the tax framework, with one million becoming higher-rate taxpayers by the fiscal year 2025/26. MoneySavingExpert.com’s Martin Lewis explains, “Imagine someone who currently earns £12,000 now. Because earnings do tend to increase each year, in a couple of years’ time they’ll earn £13,000. But because the thresholds are frozen, they will now start to pay 20% tax on some of their earnings.”
He further clarifies, “And in fact, what freezing the threshold does is that it means no matter what you earn, as your earnings increase, a bigger proportion of your earnings goes on tax. And that’s how the Chancellor makes money from it.”
In the Rachel Reeves budget earlier this year, the chancellor reaffirmed the decision to keep National Insurance and Income Tax thresholds across the UK, as well as those in England, Wales, and Northern Ireland frozen until April 2028, aligning with the previous Conservative Government’s declarations last year.
There had been rumors that the new Labour Government might push this ‘freeze’ even further to 2030.
Victor Bulmer-Thomas, in a previous blog post for the London School of Economics, warned: “The distributional impact of this particular stealth tax may come back to bite the administration that imposed it. The reason is that the impact is much more severe on those on lower incomes than those on higher ones.”
He further explained: “At the end of the fiscal year 2021/22, the median pay of a full-time worker in the UK was £33,374 similar to the example of the individual I used above. The median pay of the bottom decile of full-time workers (the lowest ten per cent) was £20,691. Using all the same assumptions as above with regard to inflation, wage increases and applying the frozen Personal Tax Allowance, a ‘typical’ individual in the lowest decile would see their tax bill increase from £1,624 to £2,906.”
He added: “This is a jump in the average tax rate from 7.8 per cent to 10.7 per cent, which is an increase of 37.7 per cent. Furthermore, the basic rate of tax needed to secure the same amount of tax from this individual would have to be 27.7 per cent – a massive increase on the ‘official’ rate of 20 per cent. No government would survive for long if it transparently imposed tax increases of this magnitude on the poorest in society.”
