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Critics call for personal allowance to be scrapped
14th Mar 2019
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Here’s one out of left field: the government should scrap the personal allowance entirely and replace it with a weekly payment of £48.08 to every adult over the age of 18 earning less than £125,000 a year.
The new proposal by the New Economics Foundation (NEF), a left wing think tank, has been welcomed by the shadow chancellor John McDonnell and the Green Party’s Caroline Lucas. The proposal will likely receive a frostier welcome among the Conservatives, who’ve overseen a decade long, inflation busting expansion of the personal allowance.
According to Alfie Sterling, the NEF’s lead economist, the proposal is cost neutral. The personal allowance is estimated to cost £111.2bn in 2019/20, according to NEF modelling using HMRC, OBR and ONS data.
A Weekly National Allowance -- as they’ve labelled it -- would reroute these savings into the weekly payment scheme. This would amount to a cost of £126.8bn, and £2.1bn child benefit increase. The increased cost, the NEF report stated, would be offset by a £20.6bn saving on the cost of means-tested benefits since the new weekly payment will boost post tax income for the lowest income families.
“The persistent increases to the personal allowance of income tax seen over the past decade represent one of the most expensive and regressive public spending initiatives of the 21st century so far,” said NEF’s Stirling.
“Costing more than the whole of defence, local government and the department for transport combined, and enriching the highest income households almost seven times faster than the poorest. It is time for policy makers to put those resources to better use.”
For a person earning £25,000 a year, the personal allowance is a tax saving worth £2,500. By replacing this with £48.08 a week instead, they will receive £2,500.16 a year. Middle earners will not be any better or worse off.
So what’s the point, then, if it’ll just lead to even-stevens? The trouble with the personal allowance, as the NEF sees it, is really at the extreme ends of the scale. In 2019/20, the allowance will be worth £6,500 in reduced tax liabilities for the 10% highest income families, but worth just £600 for the poorest 10%.
A National Allowance would lead to a comprehensive average increase in disposable income for a range of households, according to the NEF’s modelling. A single unemployed adult on Universal Credit would see their net disposable income rise by between £925 and £2500 per year.
And a household with an earner on £30,000 and a part-time worker earning £8000 with one child, receiving no universal credit would see their disposable income rise by £1,118.40 per year, with £900 of this being paid directly to the second earner.
Overall, the NEF said its policy would see 88% of all adults receive a boost in their post-tax income or have it stay the same, helping to lift 200,000 families across the country out of poverty.
If it all sounds rosy so far, the report does acknowledge the National Allowance would be political dynamite. Abolishing the personal allowance means bringing down the threshold for higher-rate taxpayers from £50,000 to £37,500 since the starting point for 40% income tax moves with the personal allowance.
The other issue, according to RSM’s Andrew Hubbard is resource. “The thought of HMRC having to deal with millions of extra taxpayers and at the same time as distributing flat-rate payments to everybody does worry me,” Hubbard wrote in RSM’s weekly tax brief. “There will be a whole host of additional implications to think through, but as a political idea for how the country’s resources are to be distributed it certain is something which should be given serious consideration.”
The shadow chancellor is certainly a fan. “This is just the kind of innovative thinking we need on how to fix the imbalances and problems of our tax system,” he told the Guardian. “I hope it will be the start of a debate about how we make tax more progressive and deliver the public services funding that is so badly needed after nine years of austerity.”