Andy Burnham's tax unfreeze plan has sparked a lot of discussion, and for good reason. While the idea of providing relief to taxpayers is appealing, the true cost of this policy is not as straightforward as it seems. In this article, I'll delve into the implications of Burnham's proposed tax changes, exploring the potential benefits and drawbacks for both taxpayers and the Treasury. I'll also offer my own interpretation and commentary on this complex issue, providing a fresh perspective on a topic that's often misunderstood.
The Personal Allowance and Fiscal Drag
One of the key issues at play here is the personal allowance, which has been frozen at £12,570 for five years. This has led to a phenomenon known as fiscal drag, where more people are being pulled into the tax net or pushed into higher tax brackets as their wages rise with inflation. By lifting the personal allowance, Burnham aims to provide some breathing space for basic rate taxpayers, but the extent of this relief is a matter of debate.
Calculating the Impact
Let's consider the potential impact of increasing the personal allowance. Using a basic UK average salary of £35,000 and assuming no additional income, we can estimate the savings for a basic rate taxpayer. If the personal allowance were increased by £480, the taxable income would drop from £22,430 to £21,950, resulting in a saving of £96 per year. This might not seem like much, but it could provide a welcome boost to many households.
However, it's important to consider the broader implications. According to personal finance expert Kate Steere, the savings for higher tax rate earners (up to £100k) would be £192, which tapers down for those earning between £100k and £125,140. While these amounts aren't life-changing, they could still provide a nice boost to around 40 million Brits.
The Treasury's Perspective
From the Treasury's point of view, the potential cost of lifting the personal allowance is significant. According to HMRC Ready Reckoner numbers, the loss of tax take could range from £4.5bn to £5.5bn annually. This raises the question: how will the Treasury recoup this lost revenue? One possibility is an increase in additional rate income tax, as Burnham has previously hinted.
The Triple Lock Rule
Another option for Burnham is to follow the triple lock rule, which would result in a 4.1% increase in the personal allowance due to 2025 wage growth figures. This would yield a personal allowance of £13,090, providing a saving of £104 for our basic taxpayer example, or £145.60 in total including NI. This approach could offer a more substantial boost to taxpayers, but it also comes with a higher price tag for the Treasury.
The Broader Implications
One thing that many people don't realize is the potential impact of this policy on homeowners. Burnham has spoken in favor of replacing council tax with an annual property tax, which could mean that any relief gained from lifting the personal allowance could be offset by increased property taxes. This structural shift could have far-reaching consequences for millions of homeowners.
Conclusion
In my opinion, the true cost of Burnham's tax unfreeze plan is not just the immediate impact on taxpayers, but also the potential long-term implications for the economy and public finances. While providing relief to taxpayers is a noble goal, it's essential to consider the broader picture and the potential trade-offs involved. From my perspective, this raises a deeper question: how can we balance the need for tax relief with the responsibility of managing public debt and ensuring sustainable economic growth?
