by Simon Bartram
Today we can expect a lot of boasting from Conservatives and Lib Dems about how they have raised the personal allowance, as if that is a faultless defence against any accusation that the poorest are being hit the hardest.
For the 2013/14 tax year, individuals earning less than £100,000 did not pay tax on the first £9,440. This personal allowance is set to rise to £10,000 for 2014/15, saving basic rate tax payers £112 (20% of £560), and Nick Clegg is pushing for the allowance to be raised still further to £10,500 for 2015/16. The extra £500 increase, this is estimated to cost the Treasury £1 billion.
Since personal allowances have rocketed from £6,475 to potentially £10,500, this must surely be one of the most recognisable changes that the coalition has enacted, and it is a one which they ceaselessly flaunt to demonstrate their egalitarian credentials.
Yet this is a very inefficient way of targeting the lowest earners in our society, given that everyone earning up to £100,000 gains from having a personal allowance (above £100,000 your personal allowance decreases gradually to zero), and, of course, households with two earners will prosper more than single occupant households. Some of those households would already be benefiting from the tax breaks for married couples where £1,000 of the personal allowance can be transferred to a spouse.
However, what is said of the coalition’s policy on personal allowances can also, largely be said for Labour’s policy of a 10p starting rate of tax – it is a tax cut which affects every earner, without efficiently targeting the poorest.
The only difference is that the married couples’ allowance, in theory, only incentivises marriage, rather than promoting a generic incentive to work by generically reducing personal tax liabilities.
The reduction of the higher rate boundary from £37,400 to £32,011 since 2010, which many senior Tories are anxious about, is an attempt to offset the benefit gained to higher income taxpayers from the increased personal allowance. Due to these allowance changes, and changes in the higher rate tax band, the 40% tax rate effectively begins at £41,451, comparable with the threshold at £43,876 in 2010.
However, this still means that individuals earning less than £41,451 benefit from an ever increasing personal allowance. When the average salary in Britain is around £26,500, the effect of the offset serves only to push some more earners into the 40% income tax band (those earning £41,451 instead of £43,876), whilst individuals earning £10,000 more than the national average have benefited from an increased personal allowance of £4,000.
We should then start to question who really benefits from increased personal allowances, especially since, according to an IFS report, in 2012–13, out of an adult population in the UK of around 51.4 million, an estimated 29.7 million individuals were liable for income tax.
In other words, many people are already exempt from income tax. In the words of the IFS, “this is a reminder that attempts to use income tax reductions to help the poorest in
the country are likely to fail, since less than two-thirds of the adult population have high enough incomes to pay income tax at all”.
Increasing the personal allowance does nothing for individuals who already do not pay income tax, and for whom tax is not the source of their poverty. Increasing the personal allowance, therefore, does little to increase their earnings, since they already qualify for the complete exemption from income tax, whilst relatively more comfortable basic tax rate payers prosper.
To gain a fuller picture of how the government affects household incomes, it is insufficient to study solely tax without any understanding of the benefits system. According to the Institute for Fiscal Studies, the poorest fifth of households gain most of their income from benefits and tax credits. To reduce the net tax (tax liability minus benefits received) of the poorest in our society, we should be increasing both their pay and their targeted credits, rather than slashing entitlements and increasing personal allowances.
While basic rate tax payers, including people earning above the national average salary, benefit from a personal allowance, over 60% of people turning to food banks are doing so because of benefit delays, low income and benefit changes. Increasing personal allowances is neither an effective nor efficient policy for solving these more important issues.
Of course, this is not to say that raising the personal allowance is a bad idea. Leaving more money in consumers’ pockets can boost an economy’s aggregate demand and lead to greater economic growth by lifting business confidence. And reducing taxes also creates more of an incentive to work – if the 1.2 million unemployed can find that work, that is.
However, those benefits have to be balanced with the need to maintain good public services, disproportionately used by people on low incomes, during a period when cuts are placing more pressures upon them, and when a political consensus has settled upon the idea of balancing the nation’s books and reducing the nation’s deficit.
So the question becomes a one of priorities. If we are to increase the personal allowance, should we not be questioning the threshold at which individuals are still entitled to this allowance, when the amounts saved by relatively higher earners could be redistributed more efficiently towards the lowest earners? Whether Labour side with Clegg on this issue or not, the left cannot just parrot the Lib Dems’ claim that the series of personal allowance increases are a huge victory for low income households. It is simply not as easy as that.
Simon Bartram is a trainee accountant working in the City of London.
Tags: 10p tax rate, Budget 2014, Ed Balls, Lib Dems, personal allowances, Simon Bartram
Of course in your last paragraph you refer to the leftist canard of redistribution. One of the main problems with our tax system is that successive governments, primarily of the left, have tried to redistribute via taxation and it has landed us with one of the most complicated taxation systems in the world. Any attempt by any government to address a problem inevitably causes another problem in doing so. There ware always losers.
The fact that we have a system of tax credits means that we are taking tax from individuals and then giving it back because the government has taken too muchof their income in the first place. Therefore increasing the personal allowance may be a step towards addressing this ludicrous situation.
Inevitably and sadly you revert to type and invoke the unemployed. Firstly its highly unlikely that they will pay any tax, so why they should be part of your blog is a mystery. Secondly you say they cant find work. Well I suggest you leave the city of London and come to my area where they much prefer to sit on the steps of a local pub where the landlord opens especilly early for them so they can spend their JSA. I know alot of them as I went to school with them and they live nearby and I can tell you – because they told me – that they dont give a toss about getting a job. So long as they ahve a beer, roll ups and a roof over their head they really dont care.
Thats the real truth, which the left dont want to acknowledge.
Hi Ex-Labour,
I think you might have misunderstood elements of my argument.
Firstly, I’m not sure where your attack on the UK tax system feeds into my post. At no point do I defend elaborate changes to the tax code – indeed, I see little merit in introducing a new 10% rate of tax, and the general thrust of my argument is against fiddling about with personal allowance thresholds. I agree that UK tax could be made much simpler – and I wish many areas of it were! But even still, you don’t argue why having a complicated tax code is always a bad idea. Shouldn’t we encourage charitable exemptions from tax, 100% first year allowances on energy-saving expenditure, different rates of VAT for essential goods, and such like? You raise an interesting discussion point, but it isn’t an agenda that neatly relates to my article. I’d be typing all day if my subject were the whole of UK tax!
Secondly, the reason that I mention the unemployed is because I find it astonishing that people like me (and there are millions of us, including many whose salary is above the national average) are being bribed with a personal allowance that (a) gives a relatively small increase in earnings to many people who don’t desperately need it and (b) could be spent on more targeted worthwhile things. It’s a gimmick – a completely blunt instrument whose value, as far as I can see, is derived from the headlines it produces. The gap between the value people place on this policy and the actual value it provides to low earners is what I tried to highlight. As the IFS shows, income tax is not a great tool for improving the lives of the bottom fifth of households (by income). So it’s grating when the personal allowance policy is used by the Coalition to flaunt their egalitarian credentials.
Thirdly, I grew up in the north of England, and I would challenge the insinuation that I’ve unwittingly produced some London-centric bias. Frankly, we can trade anecdotes until we’re blue in the face – you can trade your story of feckless unemployed drunkards for countless tales of university graduates unable to find employment despite a desperate job search – but the statistics speak for themselves. With around four people, often many more, chasing every job, you just can’t make the numbers fit the comforting fib that the unemployed deserve their fate.
Fourthly, you should note that I did not dismiss the benefits of raising the personal tax allowance. I just highlighted that this has to be balanced against the opportunity costs. Again, my aim was to unravel the myth that this policy was a huge victory for low income families.
Fifthly, I think there is much more in my commentary that you did not engage in. The reason people are turning to food banks is not because they are taxed too much.
Lastly (because otherwise I’ll produce another huge essay if I don’t limit myself), if you’re anxious about people “not giving a toss about getting a job”, then I hope you’ll be enthusiastic about Labour’s job guarantee scheme, which provides jobs for young people. If they reject the job, they lose benefits. We should invest in young people, developing their skills and work ethic, rather than paying benefits. On that note, I agree.
Source: http://www.bbc.co.uk/news/uk-politics-26506522
— Simon
@ Simon
You mentioned many good and positive points in your response, so I’m not sure why you didnt bring these out in your blog.
To put you in the picture about myself as regards my comments on the local unemployed. I grew up on a council estate in the north midlands coalfields and lived through the miners strike. However I decided I wanted to do better and paid for myself to go through college and university and now hold an MBA….and I still live in my local area, so I see the oroblems first hand. But my point is if I can do it why cant the feckless and workshy do it as well ?
You have some good ideas on taxation and VAT, but again I must point out that our ludicrously high energy bill are mainly as a result of the Climate Change Act imposing massive costs on energy producers. Guess who brought in the legislation…..yes Labour and one Ed Miliband when at DECC. I wont bore you with the scamongering science and the behaviour of “Scientivists” – they are scientists who are also green activists who are promoting bad science and computor model evidence, when in fact empirical evidence shows the complete opposite.
I dont have time to respond in ful to your points (I may do later) but my point was that our tax system is dreadful and there will be losers and winners in any change.
My other main point which you did not address was that successive Labour governments have tride to redistribute and made a mess of the system. I note that you did say there could be better things to spend the money on. Why not let people keep more of the money they earn ? Why do Labour and socialists (see McTernans comments) feel that they have the right to take more and know better how to spend it ?
Sorry about the spellings on the above post. Dashing to get a response out before work
I think it is amazing too how National Insurance is remaining largely unreformed.
It is a regressive tax that catches millions of low earners and particularly discriminates against those on zero-hour and flexible contracts. See my article http://labour-uncut.co.uk/2014/01/27/nics-currently-penalise-3-4m-of-the-lowest-paid-workers-this-must-change/
Why doesn’t the Government look at increasing the primary NI threshold, changing how it is calculated, or even potentially at a merger with income tax, as well as increasing the personal allowance?