Should we hike the income tax-free allowance to £15,000?

This is Money Podcast

The episode explores potential shifts in the UK tax system, specifically a proposed increase to the personal allowance threshold. It also de

Key takeaways

• Speculation exists that Labour might raise the personal allowance from £12,570 to £15,570 in the upcoming budget.
• UK electricity prices are significantly higher than peers like France and Sweden due to a heavy reliance on natural gas for generation.

Main topics

• Personal Allowance and Tax Reform
• UK Energy Bill Inflation

Notable quotes

We are basically paying 300 million pounds a day in debt interest now.

Conclusion

The episode provides a comprehensive look at the economic pressures fa

Transcript preview

Speaker 2 (0:02) Welcome to This Is Money podcast sponsored by Trading 212. Download the Trading 212 app today and open a cash nicer with promo code TIM to get the 12-month bonus promo rate of 5.01%. Terms apply. I'm Georgie Frost and joining me and Simon Lambert today is Helen Crane. And coming up, could we be in line for a boost in our pay packets? There's speculation Labour is planning to raise the personal allowance in the budget, but will they? And if so... How would we pay for it? Also today, how the heck did the UK's energy costs get so high? Can you still make a profit from buy to let? Yes, but only if you hit this magic number. We talk Airbnb privacy and Simon rage baits me, sending me a piece on working from home. But are we slackers really ruining it for everybody else? Don't forget, you stay up to date with all the latest Breaking Money news. Just go to thisismoney.co.uk or download the app. But first, Simon, five. 0.01%. That is the biggest figure I've read out at the top there. Is that right? Speaker 3 (1:05) It is right. And there is another cash ISA battle going on. And this is the trading 2.2 rate has moved up. really substantially. Anybody listening to this podcast, paying attention to the start of it each week will have noticed this. This is the highest rate since way earlier in 2025. It reflects what's going on in terms of interest rate expectations and what's going on in the bond market. But after we talked about how bad the big banks are at passing on higher rates to savers and how many people are sitting on... legacy low rates or insult accounts, as we like to call them on the This Is Money podcast. This is, you know, in stark contrast to this. And it is an illustration of why you need to check your savings rates and move to a better rate. Speaker 2 (1:53) Meanwhile, the speculation continues to pace ahead of next month's budget. This week, CGT was making the headlines, but also the threshold at which people start paying income tax. Now, the government is said to be considering upping the income threshold at which earners start paying tax from £12,570 to £15,570. Now, it's been stuck at that £12,000-ish figure since around 2021. And will remain there until 2031. Unless, unless it doesn't. But will it really happen? And if so, how the heck are we going to pay for it? So, Helen, Simon, welcome. Helen, the personal allowance, just remind us, what is it? Who gets it? Why is it even there? Speaker 1 (2:40) Sure. So this is the baseline amount under which you don't pay any tax. At the moment, as it stands. If you earn less than £12,570 in a year, then you don't pay any tax on your income. Obviously, lower earners, people who perhaps work part time, pensioners, yeah, who only run on the state pension, may not have to pay any tax on their earnings if they don't go above that level. Once you earn more than that, income tax kicks in and then goes up in different increments. So once you qualify for paying tax, it's 20 % between £12,571 and £50,000. 270 pounds above that the higher rate of income tax comes in which is 40 and that's on earnings up to 125 140 pounds and then anything above that is taxed at 45 and you're known as an additional rate taxpayer so it depends on band your salary or your income is essentially taxed in slices so even if you fall into the higher rate band is only on the amount of your salary that goes up above the higher rate level. Yeah, it's been in place. It's been frozen at this level for quite some time. So this rumour that's come out this week that it might be changed and changed quite significantly could be quite a big deal. Speaker 2 (4:10) So just to be clear, this is a bump to the personal allowance. This wouldn't be any unfreezing of the bans or anything like that. It's just, I mean, it gets us around that whole state pension brouhaha that we talked about a couple of weeks ago, doesn't it? Speaker 1 (4:25) Yes, exactly. So this would be effectively raising the personal allowance. So essentially the band under which you don't pay any tax to £15,570. So no changes, as we understand it, to the higher rate tax bands. It would just sort of raise the threshold at which people start to pay tax. Speaker 2 (4:46) Simon, how are we going to pay for this? Will this even go ahead? And if it does, how will we pay for this? Well, I Speaker 3 (4:51) think, firstly... There's an important thing people need to remember about the real problem with these frozen thresholds, which is the reason why there used to be a principle enshrined in the tax system, and it was literally enshrined in the tax system, that allowances went up by at least inflation, was so that when people's incomes rose, if they went up with inflation, they didn't lose out. And it's not just those people who earn... less than the personal allowance and just tip over it, like the people we're talking about who purely get pension income, for example, who are affected Speaker 2 (5:30) by this. Everyone is affected by this because Speaker 3 (5:33) freezing the allowance means that you are getting less every year compared to inflation. So if you've got someone, for example, who is in that basic rate 20 % band, so they earn between £12,570 and £50,270. If their employer decides to give them an inflation matching pay rise right now, their employer says, right, inflation is 3.1%. I'm going to give you an inflation matching pay rise. That person has not got any richer. All that's happened is the purchasing power of their income has been maintained. They haven't really had a pay rise. It's just maintained the level that it was at last year, what that money is worth. But once you take into account the fact that that pay rise falls into the 20 % pay bracket because the personal allowance has been frozen, and they haven't had an uplift underneath that bracket, then they're actually only getting 2.48 Speaker 2 (6:40) % because you've got to take 20 % of the 3.1 % they're getting. Speaker 3 (6:45) And then you go on to the 40 % tax bracket, where actually you're only getting 1.86 % of it. Now, to go back to your question of, will this really go ahead and how will we fund it? I think it's really interesting that this has cropped up now at exactly the same time as there's suddenly been talk of an early election. The polls are showing that there's a fresh poll out today as we're recording this, showing that reform are now polling slightly behind both Labour and the Tories. There is an argument that were Andy Burnham to decide it would be worth calling an early election, then it would be a good idea to do so before a potential cost of living spike kicks in. Energy prices are forecast to go up 25 % next January. There's talk of Donald Trump blocking diesel exports from the US and the price of diesel going up as high as three pounds. You know, it's looking like all this stuff off the Iran war is actually going to bite us harder and for longer than we think. So there's an argument, you know, get in there ahead of time. So it's really interesting that this has been raised now because this was definitely not something that was being talked about as being on the cards like over summer. I mean, it's a big, big jump in one go, but it has been frozen for some time. How would we fund it? Now, this is the problem, because ultimately, you don't need to be totally plugged in to the whole political, economical grid to have worked out that actually we're short of cash, not flush with cash at the moment. There's talk that the headroom John Healy has, based on the Rachel Reeves's... fiscal rules that he said he will abide by has shrunk substantially from 24 billion to maybe under 10 billion. He also has to find more money to spend on defence because we've got this commitment to raise defence spending. There is an unwillingness to cut back on welfare spending. Welfare spending is going up. We had some pretty ugly figures on debt interest this week. We borrowed way more money in August than it was thought we were going to do. More to the point. We are paying 300 million pounds a day in debt interest now. We're basically paying more interest on our debt and then having to borrow money to pay the interest on the debt. Not really the backdrop that you would think for a tax cut. However, the NIEESR research says increasing the allowance would cost about 20 billion. Dale Vince, left-wing entrepreneur, founder of the Ecotricity Energy Company, said we can pay for it by making the tax system fairer, starting with capital gains in the billions we currently hand to banks in interest. If only life was that easy. I Speaker 2 (9:50) want to get into sort of how you might restructure the tax system or sort it out, Simon. But I just want to be clear about this personal allowance. The idea is obviously you think that that will impact the poorest households the most, right? Those on the lowest income. But, you know, there's been plenty of research that says actually that is not the case. I mean, New Economics Foundation is one of those. OK, so the argument here is Speaker 3 (10:15) that... There are better ways of doing this. And if you have a limited pot of money available to fund something, then you'd be better off funding something else that is only targeted at the low earners and doesn't also benefit everybody else. However, it is also true to say that this would deliver... the same benefit basically to everybody, but that that benefit would have more impact if you are a lower earner. If you raise the personal allowance by £3,000, then people won't pay 20 % on that £3,000 anymore. That is worth £600. And it is true to state that everyone would get that £600 whose income is above that new £12,570. So actually, you're giving money to people who potentially don't need it at the top, and you've got a limited pot of money to do that. But it is also true to say that that money would have more impact on the people at the bottom. If you give someone whose income is only £12,570, £600, it's going to have a much greater impact than the £600 that you would give to me, you or Helen. And also, you get buy-in for it. It's a universal thing. And this is one of the things I think we forget nowadays is like there is an argument for having things that are universal because then everybody Speaker 2 (11:48) supports Speaker 3 (11:49) it. If you do this through the benefit system, then you get people going, well, I go out and I work hard and I have to earn my money and I'm paying loads of tax. So why are they just taking it off me and giving it to someone else? So that's the argument for doing it, actually, I would say. So Speaker 2 (12:06) how would you sort out this sort of tax system? situation, Simon, what would you do? Speaker 3 (12:14) Okay, so Labour is completely hamstrung by the daft promise they made in their manifesto not to raise income tax, national insurance, VAT and corporation tax as well. That was in there. They made that promise in order to get themselves elected when they didn't need to make that promise to