Alternatives to increasing the personal allowance to £20,000

The government’s response earlier this month to a petition calling for the income tax personal allowance to be raised from £12,570 to £20,000 was simple: there are no plans to do so.

The petition was raised on the grounds that introducing such a measure would help low earners ‘get off benefits’ and allow pensioners a ‘decent income’. As was noted in the parliamentary debate, the petition might be interpreted as a ‘cry for help’ from some taxpayers who are struggling to make ends meet and it forms part of a wider landscape of questions that parliament is seeking to address, including improving the UK’s levels of productivity, encouraging the economically inactive back into work and making work pay. 

A House of Commons briefing report published at the start of April looking at poverty levels in the UK only serves to reinforce the importance of this. The report found that groups with the highest rates of relative poverty after housing costs in 2023/24 included working age adults and children living in a family where nobody was in work. 

The tax system has a role to play in helping to address some of these issues. However, with the government’s fiscal headroom already tight, suggestions like raising the personal allowance to £20,000 are likely to be considered financially out of reach. As noted in the parliamentary debate, estimates of the likely annual cost vary but could be in excess of £60bn, similar to the government’s entire defence budget.

Some creativity and ideas for more targeted and cost-effective tax proposals may therefore be needed. One alternative to increasing the personal allowance that may still provide average workers with an increase to their monthly take home pay would be to look at National Insurance contributions (NICs).

This was clearly a favoured route of Rachel Reeves’s predecessor as savings could be felt by taxpayers sooner than alternative options, but the previous cuts to the rates of Class 1 and Class 4 NICs were costly. By way of illustration, HMRC’s latest estimates suggest that a further 1% cut to the Class 1 NIC rate for employees would cost around £5bn per annum.

Part of the rationale behind cutting the rates of Class 1 and Class 4 NICs for employees and the self-employed was that it would be targeted at workers. Individuals over state pension age usually stop paying NICs so there is effectively a double layer of tax on workers from the age of 16 up to this point, with income tax and NICs being charged.

Abolishing Class 1 and Class 4 NICs for employees and the self-employed is likely to be out of reach financially for the Treasury, with Keir Starmer suggesting such a move could cost £46bn last year. It would likely require a significant increase in the rate of income tax to offset against this. Besides representing a breach of a manifesto commitment, it might exacerbate cost-of-living challenges of pensioners.

Perhaps the answer lies with something more targeted, although clearly such measures would require a detailed cost impact analysis. Given we already have an age-related boundary for NICs, perhaps a further one could be introduced at the other end of the spectrum. There appears to be a general upward increase in the trends of young people between the ages of 16 and 24 who are economically inactive and not in education, employment or training. Perhaps then Class 1 and 4 NICs for employees and the self-employed could be raised from 16 to a higher age of perhaps 24 years old to encourage young people into the workforce. We’ve already seen exemption rules applied for apprenticeships, with employers exempt from paying NICs for apprentices under the age of 25 within approved apprenticeship schemes. The benefits include reduced employment costs and enabling the employer to invest more in developing young professionals.

Similarly, there are arguments that an age-related boundary should be raised even higher than the age of 24 so it might ease the burden on working families who can sometimes pay very high-effective tax rates, in part as a result of student loan repayments and the high-income child benefit charge. Costs would obviously be a barrier to such a move but there would be other practical issues, as NICs are still tied to state pension entitlement.

With any change there would undoubtedly be some winners and some losers. The Chancellor will be keen to balance any potential additional difficult messages on spending and tax rises in the Autumn Budget 2025 with some more positive news this time around. The challenge may be how to do so within her fiscal constraints and any giveaways may need to be laser focused.