Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard

Consultant

Replacing the personal tax allowance with a weekly national allowance: could it work?

Ever since income tax was introduced in the UK, individuals have been able to receive a certain amount of income tax-free. At various times this has been in the form of abatements or other exemptions but now it is the personal allowance which gives the relief. The personal allowance used to be available to everybody but in recent years it has been tapered away for those with incomes exceeding £100,000.  

But now a radical proposal has been put forward by the New Economics Foundation: the personal allowance should be abolished for everybody and replaced by a flat rate universal payment of £48.08 per week. We’ll get to the implications in a minute but first, why this odd sum? Well, from 6 April 2019 the personal allowance is due to rise to £12,500. For a 20 per cent taxpayer that is worth £2,500 and so if you divide this by 52 you get £48.08 per week.   

What would this change achieve? If everybody gets the personal allowance anyhow, isn’t this just taking money from people with one hand and giving it back to them with the other? For those who pay tax at the basic rate that would be the effect, but the real point is that very large numbers of people have no taxable income or income of less than £12,500 and so get no, or little, benefit from the personal allowance. So a move to this system of universal income would put real money into the hands of the poorest in society. 

Where would it come from? Higher earners! The personal allowance is worth £5,000 to a 40 per cent taxpayer and so, under the proposed system, those individuals would lose £5,000 and gain £2,500. In fact, the amount might be more than that because of the very complex way in which reliefs are given, but you get the idea. According to the study, the change would pay for itself and there would be no net cost to the Treasury. Interestingly because of the way that tax rates and allowances work in Scotland the flat rate payment would only be £45.68. I can see that difference leading to much controversy.

Could it happen? Shadow Chancellor John McDonnell has welcomed the report and, in the current febrile political atmosphere, who knows what could happen. The thought of HMRC having to deal with millions of extra taxpayers (namely those who currently have income less than the personal allowance) at the same time as distributing flat-rate payments to everybody does worry me and 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 idea of a universal basic income is not new. Finland tried an experiment in 2017 under which a randomly selected group of 2000 individuals were given £475 per month with no obligation to seek work. The results of the experiment are still being evaluated but preliminary findings are that those in receipt of the payment felt happier but it didn’t help then find work. I doubt that many people will be surprised by that conclusion!

Radical reform of the tax system is always controversial but ideas like this should certainly be looked at closely. I doubt that we will every move completely to this sort of regime but now that the personal allowance has been withdrawn for those with incomes over £100,000 I can well imagine future Chancellors looking to bring that limit down. But I can’t see them simply giving it all away without wanting to get something back.

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