Clegg is right on the personal allowance – take the poorest out of tax
Jan 2012 27

Clegg is right on the personal allowance – take the poorest out of tax8

The Deputy Prime Minister, Nick Clegg, has said he thinks the Coalition should speed up the implementation of its pledge to increase the amount of money people can earn before they have to pay Income Tax (the ‘personal allowance’) to £10,000. The level is currently £7,475 and is scheduled to rise to £8,105 but Mr Clegg argued that poor families being squeezed by the VAT hike and tough economic conditions deserve a break from taxes sooner:

“Today I want to make clear that I want the coalition to go further and faster in delivering the full £10,000 allowance, because bluntly the pressure on family finances is reaching boiling point.”

Quite right. Mr Clegg said much the same thing in January 2011 and we congratulated him then and urged Mr Osborne to take heed. But his other idea, to raise a new tax on houses worth over £2 million, is the wrong way to fund it. As Allister Heath wrote in a blistering editorial in yesterday’s City AM, the Coalition needs to wake up to the urgency of the economic problems Britain faces:

“IT is hard to understand what the coalition is playing at. Britain’s economy is stagnating, GDP appears to have shrunk in the last three months of 2011 and yet the government exudes no sense of emergency, no impression that it realises that we are in a national crisis and that radical, drastic and unpopular action must be taken.”

Raising the personal allowance to take the least well off out of taxes is right on its own merits and the Chancellor should listen to the Deputy Prime Minister. Taxing the poorest on such low incomes and then giving the money back is crazy and kills incentives for people to work and improve their lives.

Despite what some on the left may claim, raising the personal allowance will benefit the poor most, as a graph by TPA Director Matthew Sinclair illustrates. Another way of looking at the policy is to consider how much the move would reduce people’s Income Tax bill by. As you can see from the graph below, it would cut the tax bill of someone earning £26,000 a year by 14 per cent. An earner on £18,000 would enjoy a 24 per cent cut while those on £14,000 would have their tax bill slashed by 39 per cent. Obviously, those on £10,000 or less would have their tax bill completely wiped out. That has to be a good thing and shouldn’t be opposed simply because people below £7,475 already don’t pay any tax and therefore wouldn’t benefit!

But such an obviously popular and ‘progressive’ move should be used to help the Coalition take necessary steps that might otherwise be unpopular. Abolishing the 50p rate of Income Tax, for example. And it should be funded through scrapping wasteful schemes like High Speed Rail 2 and reversing the rises on international aid and the NHS budget, not from even higher taxes on other people.

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  • Anonymous

    We need to have money to spend in order to help business. Increasing the tax allowance will help, but what about pensioners? A reduction of VAT would give everybody that little bit extra to spend.

    • Anonymous

      Well, we needVAT at 10%, fuel duty abolished and the 50% and 40% rates disbanded. In return, well, there’s plenty of waste in the state. Get rid of some admirals, change local council pay structures and limit all public sector pay to 3x the local average. It is time we stopped pretending. We cannot go on with the state burning 65% of the money we earn and then borrowing ever more.

      • Blarg1987

        Although I agree with simplifying the tax system and make the state more efficent, taxes will still be around the same rate / more if we want to pay back the debt and improve services so would we go down the road of france and have toll roads and would you propose renationalisation of key services to lower tax subsidies?

  • Anonymous

    We mustn’t forget the National Insurance threshold. As we all know, it’s just a second income tax, and raising its primary threshold would – because it’s currently lower – help even more people on low incomes than raising the income tax allowance. Aligning the thresholds (at £10k by 2015?) would also pave the way for a merger or at least make tax calculations easier. I hope TPA will draw attention to this point.

    • Anonymous

      The state won’t do that though. If they increase the tax allowance (a disgusting term) then they’ll just hike NI, evening it out.

      As to amalgamating the two – NI is far, far easier to fiddle with than income tax, so they like to keep that separate. It also allows dolts to say ‘they haven’t increased taxes’ – just raised NI.

  • Patrickcsmith3

    The Tax Commission has declared support for the DPM in his seeking to bring forward,in this Parliament, the taking out of tax altogether, the first £10K of earnings, for the `honourable’ lowest earners.The 50p on higher tax payers should remain. 

    • Anonymous

      No, it shouldn’t. It should go – so should the 40% rate.

      The way forward is a much smaller state with lower, flatter, simpler taxes.

  • Andinik

    The threshold should be set at minimum wage level, its a waste of time taxing the lowest paid. Cutting VAT is pointless as people wont spend money they havent got, and in any case prices are being slashed to the bone, its the crippling and self defeating fuel taxes that need cutting.