Raising income tax threshold: boost for vulnerable or blow to public services?

The rules on e-petitions are that if a petition gets 10,000 signatures the government will respond to it. If a petition gets 100,000 signatures it will be considered for a debate in parliament (usually gaining a debate unless there is already a debate scheduled on the topic). This petition has gained 253,000 signatures, making it the second most popular petition so far this parliament (one calling for a general election has gained over 3 million signatures).

Other popular tax-related e-petitions in this parliament include one opposing changes to inheritance tax relief for working farms (154,000 signatures), one opposing VAT being placed on school fees (115,000 signatures), one proposing the personal allowance be raised to £45,000 (47,000 signatures) and one calling for social care providers to be exempted from the recent employer national insurance increase (40,000 signatures).

Eight MPs took part in the debate – five making speeches and three only interventions. This included frontbench speakers for the three main parties.

The debate was opened by Lewis Atkinson (Lab), a member of the House of Commons Petitions Committee. He began by providing some context to the discussion, saying that from 2019–20 to 2023–24, average disposable incomes after tax fell, leaving people poorer at the end of the last parliament than at the start. He noted the decisions of Conservative chancellors to freeze the personal allowance until 2028 and the announcement by the current chancellor that the freeze would not be extended beyond that.

Atkinson continued: “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, should tax bands above the personal allowance also shift? If the allowance increased by £7,500, would the basic rate threshold move to £58,000, raising the higher rate threshold? 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 as well?

Citing the Institute of Fiscal Studies (IFS), Atkinson continued that one-third of adults earn below the current personal allowance and would not benefit from the change sought by the petition. He added that the wealthiest would gain the most, making this a regressive move. He recognised pensioners' concerns (the petition’s creator, Alan Frost, is a pensioner), and argued that any policy must consider broader pension income issues, like the triple lock.

The Labour MP suggested that raising the personal allowance to £20,000 could cost over £60 billion if corresponding increases were made to other income tax thresholds and to those for national insurance. He suggested it could favour higher-income regions (like London and the South East) over lower-income areas. If funded by cuts to public services, areas like the north-east would be hit hardest, he suggested.

Conservative MPs Sir Ashley Fox and Wendy Morton intervened to suggest that freezing the basic allowance at £12,570 hits pensioners hardest, with the latter saying “a considerable number of pensioners feel aggrieved and hard done by at the moment… because of a number of policy decisions”.

Tom Morrison (Lib Dem) said that raising the personal allowance could ease pressure on struggling families, urging the government to “find ways to lower the tax burden”. He said that the Conservatives raised taxes by freezing thresholds, pushing more families and pensioners into hardship. Morrison cited Resolve Poverty, which has estimated that nearly 20% of children live in poverty. He considered the “unfair” child benefit cap to be one of the biggest drivers of rising child poverty and called for it to be scrapped.

The Liberal Democrat Treasury spokesperson, Daisy Cooper, stated that the petition reflects a “cry for help”. She praised her party’s policy in government between 2010 and 2015 of raising the personal allowance, which lifted over three million people out of income tax. She continued: “It remains our priority to raise the tax-free personal allowance, as the best and fairest way of cutting tax when the public finances allow”.

Cooper argued that economic growth is “the key to sorting out the public finances”. Improving the UK’s trading relationship with the EU would help, she said. She also proposed several ‘fairer’ ways to raise revenue, including raising the digital services tax on the 20 largest online social media platforms and search engines, increasing remote gaming duty on large, profitable gaming companies, and further reforms to capital gains tax, targeting the super-wealthy 0.1%.

The Shadow Exchequer Secretary, James Wild (Con), stated that petitioners will be disappointed—the government has “no such plans” to raise the personal allowance. He criticised the government for the high tax burden, adding that no Labour government in the past 60 years has left office with a lower tax burden than when they started.

The shadow minister repeated the House of Commons Library estimate that raising the personal allowance to £20,000 would cost between £50 and £65 billion—about the size of the entire defence budget. He suggested that, if proposed, it must come with clear choices: what spending to cut, what other taxes to raise, or whether to borrow more. “Anyone promising such an increase has to be honest about it, and set out their choices clearly and openly. The Conservatives will be doing that before the next general election”, he stated.

Wild observed that Conservative-led governments since 2010 had significantly increased the personal allowance, raising it by 40% in real terms. He acknowledged that the threshold freeze until 2028 was “unwelcome and unpopular”. However, he argued that it was necessary to provide support during the Covid pandemic.

The shadow minister asked the minister to restate the pledge to unfreeze the personal allowance from 2028. He said: “According to recent reports in the media, this is an issue that the Treasury is looking at as it tries to keep in the too-limited headroom that the Chancellor has in place”.

In regard to the position of pensioners, the shadow minister claimed that, by 2026, 9 million pensioners are expected to be taxed on their state pension. He said that the Conservatives’ ‘triple lock plus’ commitment on which they fought last year’s election would have ensured that people relying on the state pension as their only source of income would never pay income tax on it. He asked the minister to clarify how many pensioners will have to pay income tax and when.

James Murray, the Exchequer Secretary to the Treasury, responded to the debate for the government. He emphasised that the government wants to keep taxes as low as possible for working people and pensioners. He suggested that cutting more than £50 billion, as a result of raising the personal allowance, “would be equal to… slashing the NHS by a quarter” and would “undermine the work that the Chancellor has done to restore fiscal responsibility”.

The minister said that the government rejected calls to extend the freeze on tax thresholds in their first budget, allowing people to keep more of their income; support for families is available through higher national living and minimum wages and a state pension uplift, he added. He stated that the UK’s personal tax allowance is one of the most ‘generous’ in the G7.  He told MPs that the government are determined to close the tax gap as far as they can to ensure that everyone pays the tax they owe.

On the petition’s concerns about the state pension being subject to income tax, the minister said that, in 2025–26, the personal allowance will continue to exceed the basic and full new state pension. That means that pensioners whose sole income is the full new state pension or basic state pension without any increments will not pay any income tax. He added: “This year, over 12 million pensioners have benefited from a 4.1% increase to their basic or new state pension, which means that those on the full new state pension will get an additional £470.”

Full debate.