Freezing personal allowance gives opportunity to align tax and national insurance thresholds
Taxpayers may be disappointed by today’s Budget announcement that the personal income tax allowance will be frozen at £12,570 from the 2021/22 tax year, through to 2025/26.1 Depending on wage inflation over those five tax years, this could result in people paying more income tax in real terms.2 However, for those claiming universal credit, the Low Incomes Tax Reform Group points out that this blow is softened because that benefit is calculated on net income.3
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For example, an inflationary increase of around 1% would have increased the personal allowance from £12,570 in 2021/22 to £12,700 in 2022/23. This extra personal allowance of £130 would have saved a basic rate taxpayer £26 of income tax at 20%.
However, a universal credit claimant who pays income tax would only have gained the benefit of 37% of that saving, after applying the taper of 63% – just under £10.
So, while the freeze means that people will ultimately pay more tax, those at the lower end of the income scale are cushioned from its full effect.
Victoria Todd, Head of LITRG, said:
“Although freezing the personal allowance for a period of five years will mean that anyone earning above £12,570 will end up paying more tax, we think there is an opportunity for the government to use this period to benefit those on the lowest incomes and reduce complexity.
“Those earning between the class 1 primary National Insurance threshold – or, if self-employed, the class 4 lower profits limit4 – and the personal allowance do not benefit from increases in the personal allowance. The cost on them is National Insurance (at 12% for the employed and 9% for the self-employed respectively).
“Freezing the personal allowance for five years gives an opportunity – in line with the government’s 2019 manifesto commitment5 – to continue aligning the point at which classes 1 and 4 National Insurance begin to be paid with the personal allowance.
“As well as benefiting those on the lowest incomes, because national insurance will not be paid until income reaches a higher point, having two different thresholds for tax and NI also causes confusion. We hope that the government will use future fiscal events to deliver on this commitment.6”
Notes for editors
1. See Budget document, 3 March 2021, para 2.74: https://www.gov.uk/government/publications/budget-2021-documents
2. So, for example, someone earning £12,570 in 2021/22 who receives an inflationary pay increase for 2022/23 will start to pay tax, whereas if the personal allowance was indexed by inflation, they would not have done.
3. Claimants’ earned income is taken into account in the Universal credit calculation after deducting income tax and National Insurance contributions.
4. Both £9,568 for 2021/22. Class 1 primary threshold increased from £183 per week in 2020/21 (£9,516 for the year) and class 4 lower profits limits increased from £9,500 in 2020/21.
5. The Conservative party 2019 manifesto (https://www.conservatives.com/our-plan) said:
“We not only want to freeze taxes, but to cut them too. We will raise the National Insurance threshold to £9,500 next year – representing a tax cut for 31 million workers. Our ultimate ambition is to ensure that the first £12,500 you earn is completely free of tax – which would put almost £500 per year in people’s pockets.”
6. Para 2.5 of the Budget document says that “… NICs thresholds will be considered and set at future fiscal events.”
Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practicing title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Media contact: CIOT External Relations Team 0207 340 2702 and out of hours contact George Crozier 07740 477 374