Critics call for personal allowance to be scrapped

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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.”

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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By tedbuck
14th Mar 2019 16:58

I should think those earning between £100,000 and £125,000 would think it a great idea but yet again it hits those who work hard to provide for their families and gives it to those who don't. Sorry that is a harsh statement for some people who are stuck in a hole with no way out but it seems to me to be the wrong message to send out.

If the shadow chancellor welcomes it it surely must be nonsense.

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to tedbuck
15th Mar 2019 09:15

Agree with the first part entirely, but I don't think we can criticise labour's policies anymore when we have the current shambles introducing Brexit and MTD.

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to DaveyJonesLocker
15th Mar 2019 10:35

I didn't know that "Liebour" had any policies

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14th Mar 2019 17:21

I stopped reading half way through as whoever suggested this is overlooking the fact that the PA incentivises people to work or otherwise generate taxable income in the 1st place, whereas this payment could just encourage people to sit on their [***] doing nothing.

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to Justin Bryant
15th Mar 2019 09:01

I don't think it is replacing JSA - it seems to be saying it is paid to people employed....essentially rather than earning 10k and paying no tax, you actually get a supplement - well that how it reads to me....

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to Justin Bryant
15th Mar 2019 10:26

What about the staggering rise of in-work poverty in the UK? That's over 4 million workers according to some estimates. Are they malingerers and layabouts too?

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to Francois Badenhorst
15th Mar 2019 10:36

No, but they should be in charge of their own destinies and not rely on everybody to provide for them ! .

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to meadowsaw227
15th Mar 2019 13:34

Counterpoint: We live in a society and, yes, we should all chip in and take care of each other.

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to Francois Badenhorst
15th Mar 2019 10:50

Obviously not as they are "in-work" and the current PA system obviously already helps them a lot.

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to Justin Bryant
15th Mar 2019 11:29

oh yes, because £48 quid a week is such a king's ransom .... I couldn't live on it, I doubt you could Justin .
I don't think this sort of sum could encourage anyone just to " sit on their [***] doing nothing".

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to Angela Spencer
15th Mar 2019 12:37

Re-read my comment. I am merely saying the PA works well as it is for the low paid and abolishing it could be counter-productive re incentivising such people (just like working harder above £100k is a disincentive as the PA is removed). Increasing it to £12.5k p.a. was one of the few good things this government has done, possibly due to them pinching the idea from the LibDems I think.

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to Justin Bryant
15th Mar 2019 13:26

But the figures show that working poor would be better off under the proposal? And the middle class would be no worse or better off.

If the aim is to help the working poor, then the PA fails miserably and is regressive.

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to Francois Badenhorst
15th Mar 2019 13:48

maybe we should all be able to take out a loan from the government, with a pay you back later (never...) guarantee - I think Justin would be happier with that...as long as the government don't retrospectively decide you must pay the loan back.

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to Francois Badenhorst
18th Mar 2019 10:50

My point, which I will not repeat again, is they are overlooking basic human incentives & disincentives in this calculation, much like other similar bonkers ideas like charging sellers (rather than buyers) SDLT (that look good on paper only -see the book Thinking Fast & Slow for more on why tax economists etc. are usually wrong re incentives etc. due to human psychology).

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15th Mar 2019 10:25

Switzerland tried to implement this idea a couple of years ago. They (being Swiss) had a referendum to decide and rejected it.

Seems a bad idea for so many reasons!

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15th Mar 2019 11:11

It wouldn't be cost neutral as suggested, it would cost a fortune to set up and administer. And who would you trust to administer it . . . . I can't think of any organisation that would do it effectively or efficiently.

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to anthonystorey
15th Mar 2019 11:54

HMR....oh....wait .

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15th Mar 2019 12:03

Im for it in principle

in that the principle of ensuring everyone has enough money to eat, even if its not enough to put a roof over their heads.

In practice they would no doubt trim benefits down a bit, and there would be an admin cost, but if done on a blanket NI number basis direct into your bank account, no forms, no questions, no exemptions, it ought not be too hard to do. Its when they try to make it "fair" it becomes complex. It works fine for child benefit for example.

The current system is not fit for purpose, and for every homeless person you see on the street there are many more not much off. Its just not right in a country as rich as this, and whilst there are always people who take the pee, you cant then tar everyone with the brush and make claiming basics so humiliating and arbitrary.

It would cost my household £5k a year, which we can easily afford.

I have gone from living in a poophole on benefits to having a nice big house and plenty of cash. Some of those that have always lived a nice middle class existence seem to demonise the poor as being stupid or lazy. Some are yes, as are some rich people, but that doesn't mean all people on low incomes should be treated with contempt. Bit of basic dignity, and a hand up when they have fallen over is all most people ask for. Many people are too proud to take charity.

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to ireallyshouldknowthisbut
15th Mar 2019 13:28

This is a lovely, thoughtful comment. Thank you.

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to ireallyshouldknowthisbut
15th Mar 2019 15:59

Also there are many, many people not more than a payday or so away from poverty.

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By BigMuz
15th Mar 2019 12:38

a better idea would be to raise the personal allowance to say £15,000 but get rid of tax credits completely.

Never seen the sense of Tax Credits where people get the "Credits" back when they haven't paid tax in the first place.

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to BigMuz
17th Mar 2019 10:51

BigMuz wrote:

Never seen the sense of Tax Credits where people get the "Credits" back when they haven't paid tax in the first place.

Bizarrely, it's because it helps make the UK look like a low tax area.

This crass piece of Government spin was disclosed shortly after the introduction of tax credits.

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15th Mar 2019 13:27

Just another attempt to ensure that everyone has a vested interest in voting Labour into office & keeping them there!
They hope people won't notice they aren't actually gaining anything financially. But they know they WILL notice the money being paid to them separately. This is completely opposite to the action over the Community Charge Credit. Because it was lumped in with other benefits, nobody realised that it was specifically paid to enable people to be charged 20% of their local Community Charge so that, by paying something, they would feel they had a stake in local government. Instead all they noticed was that they were being charged the 20%. It should have been paid separately with advertisements shouting out that this was the average 20% charged throughout the country....i&, thus, if your Council charges you more, ask yourself why?

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15th Mar 2019 14:07

This seems an awfully complex way of extracting a bit more money from the highest earners.Why not just put the highest rate of tax back up to 50%

Also everyone currently earning between £37.5k and £50k will pay more tax than under the current rates. I can't see how that is going to persuade middle England/Wales/Scotland to switch from Tory to Labour.

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15th Mar 2019 15:07

So the millions of pensioners who just receive state pensions would now be brought into the tax system by having 20% deducted from their pensions. They might gain but imagine the administrative nightmare!

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16th Mar 2019 17:08

I'd far prefer that NICs were reformed: the current system creates very high marginal tax rates for anyone who works part-time and/or intermittently as an employee. If you earn, say, £10K over a year, working on short-term contracts on and off for, say, 4-6 months in the year, you'll pay nothing in income tax due to the PA, but loads in Class 1 NICs because it is charged weekly, not by means of an annual allowance. You can get PAYE refunded if you're a low earner, but not NICs.

I'm sceptical the minimum income idea will fly: it smacks of 'something for nothing', all rights and no responsibilities, and this will needle a lot of people's sense of basic justice and their understanding of a social contract that says everyone should be obliged to work for a living, if they are able..

Also, would this allowance only be paid to employees (the phrase "earners" was used in the article)? What about the self-employed, and those with unearned income from dividends and property?

I can also see it'll be a nightmare for HMRC to chase all the small-income people who currently fall under the PA threshold. Basically *every* work transaction, however small, would be taxed under this new system, whereas at the moment a lot of piddling stuff flies under HMRC's radar.

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17th Mar 2019 10:57

The whole issue of tax and NI for the low paid needs looking at bigstyle.

NI is a joke. A company director earning £8000 + a huge wedge in dividends pays nothing to protect his pension rights.

A self employed person earning less than £8000 pays £150.

A non-employed person with no income at all can, apparently afford to pay £700+.

From his cosy fireside, Justin may like to consider that not all the low-paid sit around all day. Some do unpaid care work for their families. Some are unemployable for health reasons. Some just need a helping hand.

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17th Mar 2019 16:14

There are record high employment levels at the minute, despite brexit. This doesn't encourage people to work.

What happens if an individual earns ,£124,999 and someone earns £125,001 - i'm guessing there will be some sort of tapering. I thought they were suppose to be simplifying tax.

If you want to get people out of in-work poverty, reduce employer NI and in turn increase NMW significantly. Encourages people to work, and more income tax and employee NI will be collected anyway.

If you get rid of Employers NI totally, you also go a long way to solving IR35/PSC issues as personal service companies will become almost redundant from an 'employers' perspective.

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to Adam12345
18th Mar 2019 09:01

Adam12345 wrote:
I thought they were suppose to be simplifying tax.

Tax is too complicated for HMRC - as the number of Self Assessment "exclusions" shows.

Step 1 would be to come up with a system that they can cope with.

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