Income Tax: Personal Allowance

James Murray Excerpts

Monday 12th May 2025 Westminster Hall

[The Exchequer Secretary to the Treasury (James Murray)]

It is a pleasure to speak with you in the Chair, Mr Stuart; this is our second debate together in the last few days. I extend my thanks, as many others have, to my hon. Friend the Member for Sunderland Central (Lewis Atkinson) for opening the debate, and I congratulate Mr Frost, who created the petition. I also thank all other hon. Members who have contributed to the debate for setting out their views.

I know that this petition has attracted almost 250,000 signatures, so, given the public interest in this topic, it is important that we are debating it. I recognise the views of everyone who has put their name to the petition, and let me be clear that, as a Government, we want taxes on working people and on pensioners, who have worked hard all their lives, to be as low as possible. We were elected to put more money in people’s pockets and, crucially, we were elected to do so in a fiscally responsible way. That is a critical point to understand. We want to keep taxes on working people and pensioners as low as possible, but if we were to follow the calls of some Opposition parties and abandon fiscal responsibility, it would lead to economic chaos and the collapse of public services, and that would harm working people and pensioners the most.

Raising the personal allowance to £20,000 would cost more than £50 billion. That is more than the £45 billion of unfunded tax cuts announced by Liz Truss in her disastrous mini-Budget. Conservative and Reform MPs may have cheered Liz Truss on, but like the British people, we in the Labour party know the damage that that caused, and we will never let it happen again. To put it another way, if £50 billion was taken out of public services, that would be equal to wiping out almost the entire UK defence budget or slashing the NHS by a quarter. The British people will not be the winners if public services collapse or chaos returns to the economy.

The Chancellor has taken the right decisions to get the UK’s public services back on their feet and to restore fiscal responsibility and economic stability. We will fight to protect those hard-won gains from those who want to see them squandered. In that critical context of fiscal responsibility, however, the Government are doing everything we can to support working people and pensioners. In our first Budget, we decided not to extend the freeze on personal tax thresholds, meaning that people will be able to keep more of their income. We are supporting hard-working families and pensioners through the plan to make work pay and through our significant increases to the national living and minimum wages and the state pension. We know that we will be able to keep taxes down only by delivering sustainable economic growth, which is why our plan for change and our trade deals are so important to make people better off.

Of course, an important context for this discussion is the autumn Budget, in which the Government reset public spending and put the public finances back on a sustainable path. The decisions in the Budget were underpinned by the most ambitious package ever to close the tax gap—the difference between what taxpayers owe and what is paid to His Majesty’s Revenue and Customs—alongside tax changes that make the tax system fairer and more sustainable while protecting people’s payslips. The Government are determined to close the tax gap as far as we can, because ensuring that everyone pays the tax they owe is critical for a well-functioning economy, for protecting revenue to fund our public services and for helping to keep taxes on working people as low as possible. In the spring statement, the Chancellor went further and faster to close the tax gap, raising an extra £1 billion in revenue for the public finances.

Turning to the personal allowance, it is worth beginning by recognising that the UK has one of the more generous personal tax allowances in the OECD, and the most generous in the G7. As we have heard in today’s debate, it was the previous Government who made the decision to freeze the personal allowance at its current level of £12,570 until April 2028. In the Budget last autumn, this Government decided not to extend that freeze and we kept the basic, higher and additional rates of income tax, employee national insurance contributions and VAT unchanged, meaning that people will keep more of their income. We also had to take a number of difficult but necessary decisions on tax, welfare and spending to restore economic stability, fix the public finances and support public services, given the situation that we inherited from the previous Government.

[Jamie Stone (Caithness, Sutherland and Easter Ross) (LD)]

I think the reason so many people signed the petition is that the plight of some of the poorest and most vulnerable in our society is on our collective conscience. I may have a helpful suggestion. I should declare an interest right away: my wife is disabled and I am her carer. I know of people who are carers and live in terror of an unexpected cost coming their way, such as the boiler breaking down in the north of Scotland or some horrifying bill throwing the finances out completely. I wonder whether it would be a kindly and humane step for the Government, or any Government, to provide for a mechanism whereby, when a nasty, surprise bill comes the way of a person caring for someone who is long-term sick or disabled, that bill could be offset against the tax payable by that person, or the married couple together.

[James Murray]

Of course, having a well-functioning welfare state is, in many ways, precisely about protecting people when they have unexpected shocks to their lives. I am not sure that the tax system is the best way to address that, but I think the hon. Gentleman’s broader point about ensuring that the state provides a safety net or cushion against unexpected shocks to people’s lives is an important principle.

The focus of today’s debate is very much on tax thresholds, particularly the personal allowance, so I will return to my comments on that. When we took office in July last year, no responsible Government could have let things carry on as they were. Likewise, no responsible Government could now raise the personal allowance to £20,000 at a cost of more than £50 billion, as such a move would put public services back on their knees or risk economic chaos that would push up inflation, mortgages and taxes.

The petition suggested that

“raising the personal allowance would lift many low earners out of benefits”.

We know that our benefits system is currently failing on all fronts; it is failing those who receive benefits, by not helping them to work where they can, and failing taxpayers more widely, through soaring costs to the public purse. We are fixing that by reforming the benefit system to make it more pro-work, while protecting those who cannot work. When people are in work, we want them to be better paid, which is why in April 2025 we increased the national living wage to £12.21 per hour, the third largest proportional increase since 2016, and that is expected to benefit over 3 million workers.

We have published the “Get Britain Working” White Paper, which sets out the Government’s plans to reform employment, health and skills support to tackle economic inactivity and support people into good work. Our plan to make work pay represents the biggest upgrade in employment rights in a generation, bringing the UK back into line internationally. It tackles poor working conditions and job security, and by making work more flexible and family friendly, it will support our wider programme across employment, health and skills policy to get Britain working.

[James Wild]

The Minister referred to the Employment Rights Bill. Has he seen the survey from the Britain Retail Consortium in which 70% of the businesses that were surveyed, which are major retailers that employ half a million people, said that the legislation would damage their business, and half said that it would make them less likely to take people on?

[James Murray]

Many employers recognise that having a productive, secure workforce who can take pride in their jobs and contribute to their fullest ability at work is important not just for the employees themselves but for the productivity of the businesses. That is why we want to see workers with employment rights that will be upgraded through our plan to make work pay, alongside, as I mentioned a few moments ago, a stronger national living wage and national minimum wage under this Government.

That focuses, however, on working people and their rights at work and their incomes. The petition also raised concerns about the state pension being subject to income tax. In 2025-26 the personal allowance will continue to exceed the basic and full new state pension. That means that pensioners whose sole income is the full new state pension or basic state pension without any increments will not pay any income tax. The state pension continues to be the foundation of support available to pensioners, backed by the Government’s commitment to the triple lock.

This year, over 12 million pensioners have benefited from a 4.1% increase to their basic or new state pension, which means that those on the full new state pension will get an additional £470. Over the course of this Parliament, the yearly amount of the full new state pension is currently projected to go up by around £1,900, based on the latest forecast from the Office for Budget Responsibility. The Government also support pensioners through a range of other means, including free eye tests, NHS prescriptions and bus passes. For pensioners who are eligible for means-tested support, we provide pension credit and housing benefit.

I recognise the substantial support for this petition. Hard-working people and pensioners who have worked hard all their lives want taxes to be as low as possible; I understand that. However, as we have set out today, we inherited a mess from the previous Government and have had to take tough choices to set us on a path to generate economic growth. Raising the personal allowance to £20,000 would undermine the work that the Chancellor has done to restore fiscal responsibility and economic stability, and it would slash the funding available for vital public services. This Government remain committed to keeping people’s taxes as low as possible while ensuring fiscal responsibility. Fiscal recklessness hits working people and pensioners the hardest. Parties promising to raise the personal allowance to £20,000 would have to explain how they would cut the NHS by a quarter, or why they want a rerun of the economic disaster we saw under Liz Truss.

We as a Government are determined to go further and faster to deliver our plan for change with its key goal of putting more money in people’s pockets by kick-starting economic growth. We will always keep taxes as low as possible while never putting security for families and pensioners at risk. I thank all hon. Members who have spoken.