This morning GBTT made the case that Britain lets people earn too much before Income Tax starts. Our Director disagrees. The history is right. The conclusion is wrong.
GBTT published an argument this morning that the income-tax personal allowance has become far too generous. I think the case deserves a reply from inside the building.
The argument is attractive on first reading. Go back to the 1970s, uprate the personal allowance by inflation, and today's threshold would be nowhere near £12,570. Successive governments, particularly after 2010, let it rise much faster. Millions of people were taken out of Income Tax altogether.
The argument then says this was a mistake. Everyone should pay at least some Income Tax, because everyone should have some "skin in the game".
The historical numbers are broadly right. The conclusion is not.
Take 1976–77. The single person's allowance was £735. Had it risen with RPI ever since, it would be worth roughly £7,000 in 2024–25 prices, depending on the inflation measure and end date used.
But why should prices be the benchmark?
A personal allowance does not exist to preserve the purchasing power of a number Parliament picked half a century ago. What matters is the relationship between the amount the state lets somebody earn before taxing them and what people actually earn.
That gives a very different picture.
In the late 1970s the personal allowance was roughly 30 per cent of mean earnings on the long-run ONS earnings series. Earnings rose faster than prices, so an allowance uprated only with RPI would have shrunk steadily relative to wages. By the 2000s it would have been worth less than 20 per cent of mean earnings.
That is not tax neutrality. It is fiscal drag. As workers become more productive and their real earnings rise, the state automatically claims Income Tax on a growing share of those earnings.
Successive governments did not accept that. The allowance was raised by more than inflation repeatedly, long before the Coalition arrived.
After 2010 the policy became far more aggressive. The allowance rose from £6,475 in 2010–11 to £10,000 in 2014–15 and £12,500 by 2019–20. Relative to earnings, the increase was enormous.
This is where the data get interesting.
That increase produced nothing resembling an equivalent collapse in the overall taxation of work.
Take HMRC's historical Income Tax and National Insurance rates and thresholds and apply them to ONS mean earnings. The tax wedge on an average worker, meaning Income Tax plus employee and employer National Insurance as a share of the total cost of employing that worker, barely moved. In 2010–11 it was 29.5 per cent. By 2019–20, despite the extraordinary rise in the personal allowance relative to earnings, it was still 26.4 per cent.
The offsets were elsewhere in the system. National Insurance kept taking a substantial share of earnings. Employer NICs kept raising the cost of employing people. Higher-rate thresholds were squeezed at various points. VAT went from 17.5 to 20 per cent.
None of this means raising the allowance achieved nothing. It cut direct taxes substantially for low and middle earners. The IFS calculates that someone on average earnings today pays around £2,000 less in Income Tax and employee NICs than someone earning the same amount in real terms would have paid under the 2010–11 system. The precise figure depends on the year, the earnings measure and the treatment of NIC reforms, so treat it as an estimate rather than a constant.
I regard that as a feature, not a bug. If government needs to raise a given amount of revenue, I would rather it did so while leaving the first slice of someone's earned income alone.
And that is why I do not buy the "skin in the game" argument.
Not paying Income Tax is not the same as not paying tax.
Employees pay National Insurance once their earnings cross the threshold. Employers pay National Insurance for employing them. Workers then pay VAT, fuel duty and a long list of other taxes when they spend what is left.
Throughout the decade in which the allowance was being pushed up, Britain's overall tax take did not collapse. Tax revenues as a share of national income were broadly stable between 2010 and 2019, though the exact figure depends on whether one uses calendar or financial years and which national-accounts measure is chosen.
The state did not stop taxing people. It changed where it collected the money.
There is a legitimate argument about whether that was the right tax mix. That is a very different argument from saying millions of people ceased to have skin in the game because they stopped receiving an Income Tax bill.
The personal allowance has been frozen at £12,570 since April 2021. Inflation and wage growth are steadily undoing the increases of the previous decade. That is fiscal drag in its purest form.
Even here the story is more complicated than "everyone is paying more". Governments partly offset the freeze through changes elsewhere, most obviously the cuts in employee National Insurance. The IFS found that, for an average earner, those NIC reductions initially offset much of the effect of the threshold freezes.
Which reinforces the point: you cannot judge the tax burden on work by looking at the personal allowance alone.
The scale of the current freeze is now extraordinary. The IFS calculates that had the personal allowance kept pace with inflation since April 2021, it would be around £16,000 in 2025–26 prices; the precise figure depends on the inflation index and the month used. The often-cited £16,070 estimate should be dated and sourced, not presented as a timeless current figure.
That number changes the debate over a £15,000 allowance.
£15,000 is not an unprecedented giveaway. On some recent price benchmarks it would not even restore the real value the allowance had in 2021.
There has to be a limit. Government needs revenue, and there is a legitimate debate about how broad the Income Tax base should be.
But I reject the idea that Britain's mistake was letting ordinary workers keep too much of their earnings before Income Tax started.
People already have skin in the game. The question is not whether we tax them, but where and how.
There is a wider point about incentives. A high personal allowance means people keep more of what they earn, particularly at lower incomes. That strengthens the reward for taking a job, adding hours or moving from benefits into work, rather than leaving people in a position where much of the extra income they could earn is lost at once to tax and withdrawn support.
That does not settle every question about the welfare system or the tax base. But it is one more reason the allowance should not be judged in isolation. Work incentives, disposable income and the transition into employment matter too.
My preference is clear: tax the first pounds someone earns less heavily, and make work pay.
Wedge = (Income Tax + employee Class 1 NIC + employer Class 1 NIC) ÷ (gross earnings + employer Class 1 NIC). Earnings are ONS mean gross weekly earnings multiplied by 52. Tax and NIC parameters are HMRC historical tables for each year. Where rates or thresholds changed within a year (2022–23 and 2023–24 employee NICs, 2022–23 employer NICs), the calculation is weighted by the number of weeks each parameter applied. Income Tax only; no Scottish rates.
| Tax year | Mean earnings | Personal allowance | Allowance as % of earnings | Income Tax | Employee NIC | Employer NIC | Tax wedge |
|---|---|---|---|---|---|---|---|
| 2005–06 | £19,864 | £4,895 | 25% | £3,042 | £1,647 | £1,917 | 30.3% |
| 2006–07 | £20,800 | £5,035 | 24% | £3,210 | £1,733 | £2,017 | 30.5% |
| 2007–08 | £21,840 | £5,225 | 24% | £3,388 | £1,830 | £2,130 | 30.7% |
| 2008–09 | £22,672 | £6,035 | 27% | £3,327 | £1,893 | £2,203 | 29.8% |
| 2009–10 | £22,620 | £6,475 | 29% | £3,229 | £1,859 | £2,163 | 29.3% |
| 2010–11 | £23,140 | £6,475 | 28% | £3,333 | £1,916 | £2,230 | 29.5% |
| 2011–12 | £23,660 | £7,475 | 32% | £3,237 | £1,972 | £2,289 | 28.9% |
| 2012–13 | £23,972 | £8,105 | 34% | £3,173 | £1,966 | £2,275 | 28.2% |
| 2013–14 | £24,232 | £9,440 | 39% | £2,958 | £1,978 | £2,282 | 27.2% |
| 2014–15 | £24,544 | £10,000 | 41% | £2,909 | £1,991 | £2,289 | 26.8% |
| 2015–16 | £25,064 | £10,600 | 42% | £2,893 | £2,040 | £2,339 | 26.5% |
| 2016–17 | £25,688 | £11,000 | 43% | £2,938 | £2,115 | £2,425 | 26.6% |
| 2017–18 | £26,312 | £11,500 | 44% | £2,962 | £2,178 | £2,504 | 26.5% |
| 2018–19 | £27,040 | £11,850 | 44% | £3,038 | £2,234 | £2,569 | 26.5% |
| 2019–20 | £27,976 | £12,500 | 45% | £3,095 | £2,321 | £2,669 | 26.4% |
| 2020–21 | £28,496 | £12,500 | 44% | £3,199 | £2,278 | £2,720 | 26.3% |
| 2021–22 | £30,212 | £12,570 | 42% | £3,528 | £2,477 | £2,949 | 27.0% |
| 2022–23 | £32,136 | £12,570 | 39% | £3,913 | £2,582 | £3,351 | 27.7% |
| 2023–24 | £34,372 | £12,570 | 37% | £4,360 | £2,506 | £3,488 | 27.3% |
| 2024–25 | £36,244 | £12,570 | 35% | £4,735 | £1,893 | £3,746 | 25.9% |
| 2025–26 | £37,908 | £12,570 | 33% | £5,068 | £2,026 | £4,937 | 28.1% |
Reading the table: the allowance went from 28 per cent of mean earnings in 2010–11 to 45 per cent in 2019–20. The wedge went from 29.5 per cent to 26.4 per cent. The 2024–25 dip reflects the employee NIC cuts; the 2025–26 rise reflects the increase in employer NICs to 15 per cent and the cut in the employer threshold to £5,000. The working is downloadable as a spreadsheet: GBTT_UK_tax_wedge_working.xlsx.