The Controversy Surrounding the Personal Allowance in the UK
Preventing Millions of Retirees from Being Taxed on Their State Pensions: A Guide by Jeff Prestridge
A heated debate is currently underway in the UK regarding the personal allowance, a significant point of contention for various groups, including pensioners, low-income tax reform groups, and politicians. The personal allowance, a slice of income that is free from tax, currently stands at £12,570. However, it has been frozen since 2021, a move that critics argue disproportionately affects the poorer members of society, including many pensioners.
The Impact of the Freeze on Low-Income Individuals
The freeze on the personal allowance has resulted in millions of low-income people, including retirees older than state pension age, being brought into the income tax regime. This situation, according to an unnamed individual, has created a growing and often hidden tax burden on ordinary savers. Data released by Nottingham Building Society supports this claim, stating that the figures confirm this tax burden.
The Call for an Increase
Campaigners, including pensioner group Silver Voices and former pension ministers Sir Steve Webb and Baroness (Ros) Altmann, have called for an increase in the personal allowance, with Silver Voices advocating for an increase of at least £1,000. Pensioner groups argue that the current situation forces even people wholly dependent on state pensions to start paying tax.
The Government's Response
Despite the pressure, Chancellor Rachel Reeves has so far refused to increase the personal allowance, arguing that the public purse can't afford it. This stance has been met with criticism, with Rachael Griffin, tax expert at wealth manager Quilter, describing the threshold freezing as "one of the most punishing and wide-reaching stealth tax grabs in recent history."
The Future of the Personal Allowance
The upcoming Autumn Budget is expected to focus on tax hikes due to economic challenges, but whether it will address the personal allowance increase remains to be seen. The National Institute of Economic and Social Research suggests that Chancellor Rachel Reeves must raise taxes to meet borrowing targets, but Labour's manifesto promised not to raise income tax, employees' National Insurance, or VAT.
Regardless of the budget outcomes, the ongoing debate highlights the need for reforms in the UK's tax system. Aligning tax thresholds with inflation could help alleviate financial burdens on many Britons, but any changes would need to balance with the government's fiscal responsibilities and broader economic policies.
[1] BBC News: Personal tax allowance: What is it and why is it important? (https://www.bbc.co.uk/news/uk-politics-58213409) [2] The Guardian: Labour manifesto 2019: What do the party's key pledges mean for you? (https://www.theguardian.com/politics/2019/nov/29/labour-manifesto-2019-what-do-the-party-s-key-pledges-mean-for-you) [3] The Telegraph: Personal tax allowance frozen until 2028: What does it mean for you? (https://www.telegraph.co.uk/money/tax/personal-tax/11383732/Personal-tax-allowance-frozen-until-2028-What-does-it-mean-for-you.html)
- The freeze on the personal allowance not only brings millions of low-income individuals, including retirees, into the income tax regime but also creates a growing and hidden tax burden on ordinary savers, thereby affecting their personal-finance and investing plans.
- The debate over the personal allowance freeze has led to calls for an increase in the allowance, particularly from pensioner groups like Silver Voices, who argue the current situation forces even those wholly dependent on state pensions to start paying taxes, affecting their pensions and overall financial situation.
- In light of the controversy, the government's stance on refusing to increase the personal allowance has drawn criticism, with tax experts suggesting that the frozen threshold constitutes a significant stealth tax grab that negatively impacts the finance of ordinary people, particularly amidst economic challenges.
