Tax, Personal Allowance Frozen

Berwick-Upon-Tweed Bay, December 2007.

The personal tax allowance has been frozen at £12,570 since the tax year 2021/22.

If you earn more than this, you pay 20% tax on earnings above it. Until you reach the threshold for the higher tax rate (40%), at which point you start paying 40% tax. The higher rate kicks in at £50,270, which has also been frozen.

For a person earning £13,570, that’s £1,000 above the allowance, so the tax is £200.

For a person earning £50,000, that’s £37,430 above the allowance, so the tax is £7,486.

It’s hard to say what the increase in the allowance would’ve been by now, had it not been frozen. The exact figure depends on things like inflation and politics. To make things simple, let’s assume it would’ve gone up by £1,000 (possibly too small an increase given all the inflation we’ve had), taking it to £13,570 this tax year.

At this amount, anyone earning £13,570 would now pay no tax, a saving of £200. Anyone earning £50,000 would now pay tax on £36,430, also a saving of £200. Both people save £200.

This means that both people are paying £200 a year more in tax, due to the frozen allowance, both people. £200 to someone on £50,000 a year is a little; £200 to someone on £13,570 is a lot. Where’s the fairness in this.

This is called fiscal drag.

The chancellor has just extended the freeze until 2031.

Who knows what the allowance will be by then if it hadn’t been frozen. I’ve read in a few papers that it could go up by as much as £5,000 (by then it will have been frozen for nine years). That’s £1,000 extra tax for someone earning £17,570 a year and £1,000 for someone earning £50,000 a year. Appalling.

A much fairer way of doing this would be to increase the 20% rate by 1% and increase the personal allowance by an amount that leaves the tax take the same. The Guardian wrote about this recently. With this approach, they reckon that anyone earning less than £35,000 a year would pay less tax, the lower the earnings the less the tax. Anyone earning more would pay more tax, the greater the earnings, the more the tax.

This seems to be a lot fairer to me.