The personal allowance has been frozen at £12,570 since 2022
Dale Vince (Image: Ian Forsyth, Getty Images)
The Government should increase the personal allowance by £3,000 by halting the Bank of England’s practice of paying interest to banks on their reserves, according to Ecotricity owner Dale Vince. The green energy entrepreneur claimed that scrapping the personal allowance freeze could generate a 1.2% boost to GDP.
Mr Vince argued the measure could be financed by the Bank of England ceasing interest payments to commercial banks on their reserves. The personal allowance, the threshold at which most workers become liable for tax, has remained frozen at £12,570 since 2022.
Speaking on BBC Radio 4’s Today programme, Mr Vince suggested the policy could generate £30 billion annually, sufficient to fund the tax reduction. The personal allowance would increase to £15,570 – broadly in line with where it would have stood had it tracked inflation.
According to modelling by the National Institute of Economic and Social Research (NIESR), this would translate to £600 in additional income for the lowest-earning 20% of workers.
Mr Vince, who has previously donated millions to Labour, said: “The income tax allowance freeze is a great example. We’ve taken £600 from millions of people and we’ve actually impaired the economy.
Sir David Gauke (Image: NurPhoto, NurPhoto via Getty Images)
“If we put that back, respected economists have modelled the impact and it’s a 1.2% GDP growth in year one, that’s a doubling of GDP (growth) by restoring the income tax allowance.”
Mr Vince has additionally proposed aligning capital gains tax with income tax rates in a pre-Budget submission to the Treasury. Labour is reportedly weighing up his recommendations, according to the Telegraph.
He argued that banks would continue generating substantial profits and noted the European Union had already implemented comparable measures.
He said: “It will cost £20 billion actually to restore the income tax freeze, which is really robbing people, particularly hard-working people. We pay interest to the banks every year totalling about £30 billion, you know the banks that don’t really pay us any money for our deposits with them, we through the Bank of England pay them 4% at the moment for the money that they’re sat on… £30 billion, take that back, pay for the income tax allowance, and have £10 billion in change.”
Doubt cast
Former Conservative Treasury minister Sir David Gauke questioned whether the policy would prove viable.
Sir David told BBC Radio 4: “Anything that sounds too good to be true is almost certainly too good to be true. I’m very sceptical that you can raise that sort of money from the banking sector, without it having a significant impact on competitiveness, a significant impact on lending to small businesses in particular.”
He continued: “There isn’t, I’m afraid, an easy answer whether that’s the banking sector or a few high net worth individuals, our tax system is already very dependent upon the very wealthy. I’m afraid that answers that sort of sound terrific and mean ordinary people are unaffected are not going to be credible.”
Personal tax allowance freeze
In last November’s budget, then-chancellor Rachel Reeves confirmed the personal allowance freeze, alongside income tax thresholds, would remain in place until 2031. Previously, it had increased in line with inflation. This practice was halted by the then-Conservative government in 2022, following the Russian invasion of Ukraine and escalating costs.
With prices continuing to climb, the frozen income tax thresholds and personal allowance have generated what’s known as “fiscal drag”, whereby workers receiving salary increases to offset inflation find themselves moved into higher tax bands, diminishing their actual earnings. In its assessment published with last year’s budget, the Office for Budgetary Responsibility (OBR) calculated that maintaining static tax thresholds and the personal allowance would generate an additional £66.6 billion between 2022 and 2031.
Sir David suggested Labour must identify savings, potentially including ending the triple lock in the following parliament, to “restore some credibility with the markets”. He went on to say: “If we’re going to raise more in taxes, (it’s) better to do broad-based taxes than anything narrowly hitting one group of people or one type of business.”