Income Tax: Personal Allowance

Lewis Atkinson Excerpts

Monday 12th May 2025 Westminster Hall

[Lewis Atkinson (Sunderland Central) (Lab)]

I beg to move,

That this House has considered e-petition 702844 relating to the Income Tax Personal Allowance.

It is a pleasure to serve with you in the Chair, Mr Stuart, and it is a privilege to open the debate as a member of the Petitions Committee.

All colleagues from all parties will recognise the priority that the public place on improving living standards, as our conversations with constituents, polling and the facts of the matter tell us. The reality is that average disposable incomes after tax fell from 2019-20 to 2023-24 —an unprecedented and shocking situation in which people were left poorer at the end of the last Parliament than they were at the start of it. That is the key context for today’s debate, which has been triggered as a result of more than 250,000 citizens signing the petition on income tax personal allowances. It also speaks to wider and entirely understandable public frustration about living standards.

In preparation for the debate, I had the pleasure of talking to Mr Alan Frost, the creator of the petition and a constituent of the hon. Member for Bridgwater (Sir Ashley Fox). Mr Frost, who is in the Gallery, explained that he has recently retired, having worked his whole life. He feels a sense of injustice that his state pension is considered as income for tax purposes, and that the tax thresholds he faces are not increasing.

The events that led to that situation are as follows. In the 2021 spring Budget, the right hon. Member for Richmond and Northallerton (Rishi Sunak), who was Chancellor at the time, announced that the income tax personal allowance threshold of £12,570 would be frozen until April 2026. In the 2022 autumn statement, the Chancellor at that time, the right hon. Member for Godalming and Ash (Sir Jeremy Hunt), announced that the freeze would be extended for a further two years until April 2028. Following the change of Government, the current Chancellor announced in her autumn 2024 Budget that the freeze would not be extended any further, and therefore income tax personal allowances are expected to next rise in April 2028.

Although Mr Frost is a pensioner and his petition reflects a desire to boost pensioner incomes, he also believes that significantly increasing the personal tax allowance would benefit those in work, boosting incomes and reducing the need for benefits. That belief reflects the reality that less than a quarter of the 37 million income tax payers in the UK are over the age of 65. The vast majority of those paying income tax are of working age and are not receiving the state pension.

In their written response to the petitioners, the Government highlighted that making the suggested changes to the personal allowance would cost “many billions of pounds”. I am sure that the Minister will say more about that when he responds, but cost is a key element to discuss in our debate. It is Parliament’s responsibility to agree the ways and means of any policy it makes—that is, how to pay for what we decide to do.

I gently suggest that the events of the last Parliament remind us how serious that responsibility is. The mini-Budget of September 2022 announced tax cuts costing around £45 billion without explaining how they would be funded, and the market reaction to that announcement left ordinary people paying the price. An emergency reversal of those tax changes followed, but not before high inflation and interest rates hit the standard of living. I therefore urge our debate to be conducted in full consideration of the cost and funding of any tax policy changes.

Were income tax personal allowances to rise in the way suggested by the petition, there would be several other linked tax policy choices to be made, and those choices would determine the full cost of the change. For example, would the size of the tax bands above the personal allowance be maintained? Currently, the basic rate of 20% is levied above the personal allowance and up to about £50,000 of income. Would the size of that band be maintained if the personal allowance were increased by £7,500? If so, the point at which the higher rate of tax takes effect would, in turn, increase to almost £58,000, at further cost to the Exchequer.

Similarly, the additional rate of tax is currently levied on incomes above £125,000, so if the personal allowance was to rise, would that level rise proportionately too? Finally, the income tax personal allowance is aligned with the level at which people start making national insurance contributions; should that level also rise to £20,000, or would we return to a more complicated tax system in which income tax and national insurance thresholds were no longer harmonised?

[Sir Ashley Fox (Bridgwater) (Con)]

I am grateful to the hon. Gentleman for introducing the debate. Will he join me in paying tribute to my constituent, Mr Alan Frost, for raising the number of signatures required to achieve the debate? Does he also agree that freezing the level of the basic allowance at £12,570 most heavily impacts pensioners with limited income, who find themselves paying more income tax on small occupational pensions as time goes by?

[Lewis Atkinson]

Of course, I join the hon. Gentleman in paying tribute to his constituent for securing this debate; 250,000 signatures is an extraordinary level of engagement in the democratic process, and that is to be applauded. I will make some points about the distribution of the benefits of income tax freezes later on in my speech.

The cost of the policy requested by the petition depends on the answers to the questions I just posed. Other Members may wish to speak about how they would approach such matters, but, to aid debate, I thought it would be useful to present some indicative costs. At this point, I want to place on record my thanks to the staff of the House, including those from the Petitions Committee and the Library, for their work in helping me to access such information.

The House of Commons Library estimates that it would cost more than £60 billion to increase the personal allowance to £20,000, make corresponding increases to the higher rate tax threshold, and raise the national insurance threshold to £20,000 to maintain alignment. That figure is consistent with the range of costs expected by the Institute for Fiscal Studies, which I also met in preparation for this debate. The IFS estimates that increasing the personal allowance to £20,000 would cost somewhere in the range of £40 billion to £90 billion, depending on the choices made on the related tax matters that I have outlined.

To put those figures into context, at a minimum cost of £40 billion, the proposal would be at least as large as the tax measures proposed by the September 2022 mini-Budget, which were then quickly reversed after the economy crashed. At the higher end of the estimates—£90 billion—the cost of such a change would be around the same size as the entirety of public revenue spend on education, or two thirds of the total cost of the state pension. It is not for me, in introducing the debate, to advocate one way or another, but I urge Members contributing to speak frankly about the costs and funding of any tax changes they favour.

I hope it is also useful briefly to provide some context about how individuals throughout the UK would be impacted by increases in the personal allowance. The IFS notes that the income level of one third of adults is already below the existing personal allowance. That group—those with the lowest incomes in society—would not benefit from the changes sought by the petition, while the greatest benefits would be received by those who are best off. That is to say, in net, such a change would be regressive, increasing inequalities of income.

[Wendy Morton (Aldridge-Brownhills) (Con)]

I thank the hon. Gentleman for setting out the petition’s argument. I came to the debate because an unusually high number of my constituents signed the petition. On the hon. Gentleman’s point about disparities, does he not agree that a considerable number of pensioners feel aggrieved and hard done by at the moment—and rightly so—because of a number of a policy decisions? That is why it is worth the Government having a proper look at the petition and what it proposes, and not just the financial aspect. If pensioners were able, for example, to earn a little more before they hit the threshold, they would have more to put back into the economy, and those who continue to work might want to do so for a little longer.

[Lewis Atkinson]

I thank the right hon. Lady for that intervention. Of course, it was the previous Government who harmonised the income tax thresholds for pensioners and those of working age alike, the situation having previously been different. I absolutely recognise the stress felt by pensioners around the land. That is why such a debate is difficult without wider consideration of pension incomes and in particular the maintenance of the triple lock, which is not the subject of this debate, but which strikes me as important to consider.

As I was saying, there is a disparity between the potential benefits of a significant increase in the personal allowance for those with different levels of income, with those earning the most benefiting the most from such an increase. Members may also wish to know that there would also be significant geographic differences in the impact of any changes. The places with average lower levels of income—for example, Sunderland—would lose out relative to places with higher average incomes, which are disproportionately in London and the south-east. Were such tax changes funded by cutting public services, regions such as the north-east would lose out even more. I hope those matters of context will help inform the debate this afternoon.

I will end where I started, with a reflection of public sentiment on living standards. As other Members have mentioned, there is undoubtedly a strength of public feeling on these matters. We have to be frank: it is our job to improve the incomes and lives of the people that we serve. When I am out in Sunderland Central every week, that is the key issue that people raise with me, because for years they have been no better off and, in many cases, they are struggling to make ends meet. I get it. Putting more money in people’s pockets so they can do what they want is the public’s top priority. A key part of that is managing the public finances well. We all saw what the Liz Truss mini-Budget and unfunded half-baked tax plans did to living standards.

[Wendy Morton]

Will the hon. Gentleman give way on that point?

[Lewis Atkinson]

No, I will make progress. The public expect us to do better than that and they expect us to do more. They want wages and pensions to go up faster than inflation, as is now starting to happen. They want to the personal allowance to rise. I pay tribute to Mr Frost again for calling for those measures, and to all those who signed the petition. We should be hugely thankful to have citizens who are engaged in our parliamentary democracy, as the 250,000 people who signed the petition are. I look forward to an interesting, and I hope informed, debate.

[Graham Stuart (in the Chair)]

Members will have noticed that the in-Chamber clock is not functioning, but the time can be seen on the annunciator—time is probably not of the essence in this debate. I remind Members that if they want to speak, they should bob, but I do not think that applies either.

--- Later in debate ---

[Lewis Atkinson]

I will be brief. I thank all hon. Members for their contributions. A debate on tax policy can be somewhat dry, but it is important to remember, as hon. Members on both sides of the House have reflected, that there are personal stories and circumstances behind all the signatories to this petition and the emails in our mailboxes. People are struggling to make ends meet and trying to do the best for their families and raise their standard of living. It is important to remember that.

On behalf of the Petitions Committee, I thank the Minister for his response to the debate and all the Members who attended. I particularly thank Mr Frost for instigating the petition and all the petitioners who signed it. We have had a short but important debate this afternoon on the nub of the key economic policy debates facing the country.

Question put and agreed to.

Resolved,

That this House has considered e-petition 702844 relating to the Income Tax Personal Allowance.