Chancellor told by MPs freeze is ‘biggest impact’ on living standards as support soars for campaign to raise limit
Chancellor John Healey was told of the impact of the income tax threshold freeze (Image: Parliament TV)
Chancellor John Healey has given an update on frozen tax thresholds as support soars for calls to raise the lowest limit from £12,570 to £20,000. In his Budget Mr Healey failed to change the situation in spite of growing opposition.
A petition on the Parliament website is calling for the lowest tax threshold – presently £12,570 – to be increased to £20,000. Support has soared in the last week to more than 41,000 signatures – it will prompt an official Treasury response – and if gets to 100,000 will be considered for a Parliamentary debate – but there is just 24 hours left.
At the Treasury Committee this week an MP confronted the Chancellor saying the Office for Budget Responsibility had said the freeze was the ‘biggest impact’ on disposable income. Liberal Democrat MP Bobby Dean said: “The OBR noted that the freeze on tax thresholds is having the biggest impact on people’s disposable income and therefore on their living standards. You said that you did not want to raise taxes, but over the course of this Parliament that threshold freeze is the equivalent of putting about 2% onto income tax.
“If you were to take the decision to raise income tax by 2%, you would be expected to explain that at the Dispatch Box, but freezing the thresholds was not mentioned at all in your Budget speech. Do you think it is fair on the public for them to see an effective tax rise without it being explained or justified?”
Mr Healey replied: “The decision on thresholds had already been taken; it was not a fresh decision for me for this Budget. I wanted to reject any arguments for an across-the-board increase in taxes, which I did. “The second thing I wanted to do was to make sure that, as a governing party, we could respect and follow the commitments that people voted for us on at the election: that we would not raise the levels of income tax, national insurance or VAT.”
Mr Dean replied: “Do you accept the OBR’s analysis that the freeze on thresholds is one of the primary drags on people’s living standards?“ The Chancellor said: “ I accept that the freeze is there in the numbers: the contribution it makes to the finances, and, in the analysis, the impact that it has on people’s incomes. I am very conscious of that. It is also there in the numbers just how expensive it would be to change it.”
The petition, launched by Wade Reid, declares: “The personal allowance has been frozen while living costs have risen, meaning workers pay more tax in real terms. Increasing it to £20,000 would put more money into millions of workers’ pockets, helping with rising bills and supporting low and middle earners.
“The personal allowance has been frozen since 2021 while living costs have risen sharply, meaning workers are paying more tax in real terms. As wages increase slightly to keep up with inflation, more people are pulled into paying tax or higher rates. Increasing the threshold to £20,000 would put more money into millions of workers’ pockets, ease financial pressure, and support low and middle earners during a cost of living crisis.”
This freeze has continued to drag more earners into paying income tax or entering higher bands as salaries increase. According to the most recent HMRC figures, there are 31.4 million basic-rate taxpayers across the country. This represents a 15% rise in the number of people paying income tax at 20% since tax bands were frozen at 2021 levels.
Some 7.7 million people are anticipated to pay the higher rate this year — an increase of one million compared to two years ago. A further 1.3 million individuals are projected to pay the 45% additional rate — considerably more than the 263,000 people who paid it in 2010-11 when it was first introduced.
Had the threshold kept pace with inflation, it would stand at approximately £16,072 next year and £17,380 by 2029-30, according to research by AJ Bell. Should Mr Burnham choose to raise the personal allowance to £16,000, this would come at a cost of roughly £35bn, the investment platform noted.
To view and back the petition click here. View the Treasury Committee hearing here.