It is currently frozen at £12,570 and has been since 2022
The Government should raise the personal allowance by £3,000 by stopping the Bank of England paying interest to banks for their reserves, Ecotricity owner Dale Vince has said. The clean energy tycoon said getting rid of the personal allowance freeze could lead to a 1.2% growth in GDP.
Mr Vince said it could be funded by the Bank of England no longer paying interest to commercial banks on their reserves. The personal allowance, the point at which most workers begin to pay tax, has been frozen at £12,570 since 2022.
Mr Vince told BBC Radio 4’s Today programme the policy could bring in £30 billion a year, which would cover the tax cut. The personal allowance would rise to £15,570 – which is almost what it would have been if it had risen in line with inflation.
It would equate to £600 extra money for the bottom 20% of workers, according to modelling by the National Institute of Economic and Social Research (NIESR).
Mr Vince, who has previously donated millions to Labour, said: “The income tax allowance freeze is a great example. We’ve taken £600 from millions of people and we’ve actually impaired the economy.
“If we put that back, respected economists have modelled the impact and it’s a 1.2% GDP growth in year one, that’s a doubling of GDP (growth) by restoring the income tax allowance.”
Mr Vince has also suggested bringing capital gains tax in line with income tax in a pre-budget submission to the Treasury. Labour is said to be considering his proposals, according to the Telegraph. He said banks would still make large profits and the European Union had already taken similar action.
He said: “It will cost £20 billion actually to restore the income tax freeze, which is really robbing people, particularly hard-working people. We pay interest to the banks every year totalling about £30 billion, you know the banks that don’t really pay us any money for our deposits with them, we through the Bank of England pay them 4% at the moment for the money that they’re sat on… £30 billion, take that back, pay for the income tax allowance, and have £10 billion in change.”
Doubt cast
Former Conservative Treasury minister Sir David Gauke cast doubt on whether the policy would work.
Sir David told BBC Radio 4: “Anything that sounds too good to be true is almost certainly too good to be true. I’m very sceptical that you can raise that sort of money from the banking sector, without it having a significant impact on competitiveness, a significant impact on lending to small businesses in particular.”
He added: “There isn’t, I’m afraid, an easy answer whether that’s the banking sector or a few high net worth individuals, our tax system is already very dependent upon the very wealthy. I’m afraid that answers that sort of sound terrific and mean ordinary people are unaffected are not going to be credible.”
Personal tax allowance freeze
In last November’s budget, then-chancellor Rachel Reeves announced the freeze on the personal allowance, as well as income tax thresholds, was due to continue until 2031. It had previously risen in line with inflation. However this was stopped by the then-Conservative government in 2022, in the aftermath of the Russian invasion of Ukraine and rising prices.
As prices have risen further, freezing income tax thresholds and the personal allowance has created so-called “fiscal drag”, where people getting pay rises to deal with inflation are pushed into higher tax brackets, eroding their real-terms pay. In its report published alongside last year’s budget, the Office for Budgetary Responsibility (OBR) said not increasing tax thresholds and the personal allowance would bring in an extra £66.6 billion from 2022 to 2031.
Sir David said Labour needed to find savings, including potentially stopping the triple lock in the next parliament, to “restore some credibility with the markets”.
He continued: “If we’re going to raise more in taxes, (it’s) better to do broad-based taxes than anything narrowly hitting one group of people or one type of business.”
