Key moment hit as Treasury to make official response to calls as millions hit by 'fiscal drag' with poorest paying more due to freeze
A campaign to raise the income tax personal allowance from the current minimum of £12,570 to £20,000 has passed a key threshold. The petition on the Parliament,UK website soared past 10,000 signatures this week, meaning the government has to give a response to the urgings.
Since the fiscal year 2021/22, a number of tax allowances in the UK have been “frozen”, meaning they have no longer been increased in line with the cost of living. Freezing tax thresholds increases people’s taxable income without tax rates actually increasing. This results in additional revenue to the government. This phenomenon is called ‘fiscal drag’, as more taxpayers are ‘dragged’ into paying tax, or into paying tax at a higher rate.
The Office for Budget Responsibility has shed light on the situation with forecasts that by 2025/26, due to these freezes, an extra 1.3 million individuals will be roped into the tax net, and a million will be bumped up to a higher tax rate. The founder of MoneySavingExpert.com, Martin Lewis, previously illustrated the trap: “Imagine someone who currently earns £12,000 now. Because earnings do tend to increase each year, in a couple of years’ time they’ll earn £13,000.
Last year’s Rachel Reeves budget confirmed that National Insurance and Income Tax thresholds across various regions would stay put till April 2028. Victor Bulmer-Thomas, writing on an LSE blog, previously said it was disproportionately imnpacting the poorest people: “The distributional impact of this particular stealth tax may come back to bite the administration that imposed it. The reason is that the impact is much more severe on those on lower incomes than those on higher ones.
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