Higher income tax thresholds won’t benefit the lowest-paid

No manifesto for 2015 will be complete without a promise of a tax cut. Yesterday we got our first glimpse of what the Tories might offer. Senior party figures say they want to raise the personal allowance to £12,500, matching a pledge made by the Liberal Democrats. Ministers have pitched the higher allowance as a way to help the lowest earners. There may be good reasons to raise the allowance, but helping the lowest-paid isn’t one of them.

Why so? Because by 2015 Britain’s five million lowest-paid people will earn too little to pay tax — not least because of steps already taken by the coalition. Earning below the tax allowance of £10,000 a year, none of these five million will see a penny from further increases. Only about 10 per cent of the cost of the policy would go to workers earning between £10,000 and £12,500. By far the biggest share would go to everyone else. Anyone earning from £12,500 to £100,000 a year would get the full benefit. No doubt this will be welcome for hard-pressed workers but you can’t call it a tax cut targeted at the lowest paid.

When it comes to whether the policy targets low-income households, things get even more complicated. Richer households are more likely to have two workers and benefit twice. That helps to explain why most of the gains go to the top half.

The benefits of a higher allowance for families with children are even murkier. That’s because of the design of the Government’s new welfare system, Universal Credit. Unlike today’s system, Universal Credit will judge how well off a family is on the basis of income after tax. The result? If the Government puts money in your pocket with a tax cut, Universal Credit takes most of it straight back out — two thirds of it to be precise. This will affect roughly half of all families with dependent children. It’s a problem not just for the Tories — it also applies to Labour’s reintroduction of the 10p rate.

None of this is to say that there’s no merit in raising personal allowances but if you’re looking for a policy to help Britain’s lowest-paid people, this isn’t the one. It’s not even the best option among tax cuts — while the income tax allowance has already risen to £10,000, the starting point for national insurance remains below £8,000. Confronted with these two systems, the decision to prioritise an income tax threshold of £12,500 is inexplicable. If parties want a manifesto tax cut that advances social justice, a higher NI contributions threshold would be a better priority.

This article originally appeared in The Times