It’s never been more important to use all of your your tax allowances. As the election campaigning ramps up we will hear more and more about tax cuts to in votes, but the latest data from HMRC shows that their total revenues from tax receipts and National Insurance Contributions were £827.7bn from April 2023 to March 2024, up £39.1bn on the previous year.
It has increased by a striking 83% since the Conservatives came into government in 2010, when it was £453bn. Inflation over the same period has only increased by 49%, which means a purely inflationary increase would have only cost taxpayers £674bn, some £153.7bn less than they paid in the past year.
And it can’t all be blamed on Covid. Since the year 2019/20 tax revenues rose from £633bn to £827bn, a rise of 31% versus an inflationary equivalent of 23%. Well above inflation but better than the 14 year trend.
Much has been made of the fiscal drag, as personal income tax allowances have been static for a number of years, bringing many more people than ever before into paying tax or into a higher tax threshold. It’s expected that around 2.5m more people will be paying tax in 2024 as a result, causing well publicised problems for HMRC’s overloaded helpdesk services.
Personal income tax allowances and thresholds have been frozen since 2021, and Jeremy Hunt announced his intention to continue this until 2028. They would normally increase in line with CPI. The personal allowance and higher rate thresholds have been £12,570 and £37,700 since 2021, respectively. If they had been linked to CPI they would have been set at £15, 225 and £60, 886 for 2024-25 respectively. To someone earning £50, 000 that equates to £13, 000 in extra tax paid over the duration of the allowance freeze.
That said, the personal allowance was just £6, 475 in 2010/11 and despite the recent freeze £12, 570 now is arguably a reasonable increase in real terms during that period.
We will undoubtedly hear more about this as we the polling stations, but it is not a problem specific to the current government. It is unclear if or how Labour plan to address this as they have avoided any real detail on the subject to date.
Rishi Sunak has promised to keep the state pension free from tax if he returns as PM, but that won’t help those below state pension age and will be a relatively insignificant tax saving to those enjoying a decent retirement income with little reliance on the state pension. Both parties face a difficult balancing act as the undoubted generosity of the triple lock pension which has boosted state pension earnings beyond anything originally anticipated, is a major reason why more retirees face paying tax. At the same time it’s an enormously popular policy amongst pensioners for obvious reasons, and neither party dares remove it.
What is clear is that you should use every tax allowance you do get to its maximum. This is a subject we will cover at your next review meeting.