Why everyone earning less than £125,000 should be given £48 per week The personal income tax allowance is billed as a way of supporting people on low incomes. It could hardly be further from the truth

On 1 April 2019, the Government will complete one of the most expensive and regressive public spending projects of the 21st century so far: a decade-long expansion of the personal allowance of income tax.

Designed to protect people’s initial income from tax, the policy is often billed as a way of supporting people on low incomes. The spin is highly effective, but it could hardly be further from the truth.

‘The personal allowance is expected to be worth around £6,500 in lower tax for the richest 10 per cent of households, compared with just £600 for the poorest 10 per cent’ i's opinion newsletter: talking points from today Email address is invalid Email address is invalid Thank you for subscribing! Sorry, there was a problem with your subscription.

At a cost well in excess of £100 billion per year in foregone tax receipts – more than the departments for defence, local government and transport combined – next year the personal allowance is expected to be worth around £6,500 in lower tax for the richest 10 per cent of households, compared with just £600 for the poorest 10 per cent.

Who benefits from the personal allowance

How can this be so? Families with little or no taxable income by definition miss out on the benefits of a higher tax allowance altogether. Meanwhile, families with two or more people with taxable income get the benefits multiplied for each person.

The personal allowance is worth double for the 13 per cent of highest income adults

But perhaps most importantly of all, the personal allowance is worth double for the 13 per cent of highest income adults. This is because the higher rate threshold – the level beyond which additional income gets taxed at a rate of 40 per cent and set at £50,000 for the 2019/20 financial year – rises pound-for-pound automatically with any increase in the personal allowance. This increases the amount of top incomes taxed at 20 per cent rather than 40 per cent.

This ‘welfare for richest’ has been expanded just as billions of pounds have been cut from UK’s threadbare social security system. Many of our lowest income families have seen their welfare payments eaten away by inflation for four years, and child payments scrapped entirely for third and subsequent offspring.

With recessionary threats looming, from a Brexit ‘no deal’ to Chinese stock markets, the UK’s worn-out safety net should be a cause for serious concern for economists and politicians alike.

All this begs a question: could the colossal sum of spending on the personal allowance be put to fairer and more effective use? At the New Economics Foundation, we have launched a new proposal to do precisely that. In a new report published today, we recommend abolishing the personal allowance and replacing it with a new payment equal to the tax that would otherwise be paid on the first £12,500 in income, around £48 per week in the UK outside of Scotland.

We combine this new payment with an increase in child benefit that reverses the real terms cuts seen since 2010, to create a new Weekly National Allowance paid to almost every adult in the UK.

How the new payment would be administered

This new payment could be administered by HMRC and made payable to every adult over the age of 18 with a national insurance number and total annual income less than £125,000 – since those earning above £125,000 do not have a personal allowance in the current system, they would also not receive the new payment.

The weekly sum would be entirely tax-free, but it would be scored in the means testing of other benefits – such as universal credit and pension credit – on the same basis as the untaxed earnings it would otherwise be replacing.

‘The poorest 10 per cent of households would see their disposable income increase by around £1,200 per year, lifting around 200,000 families out of poverty. Meanwhile, the richest 10 per cent would contribute around £40 per week extra in tax’

The most important effects of the proposal are threefold. First, it would be highly redistributive. Those earning above the higher rate threshold would pay a little more in tax than they receive back in new payments, and this would fund the Weekly National Allowance paid to all those with incomes below £12,500. Overall, the poorest 10 per cent of households would see their disposable income increase by around £1,200 per year, lifting around 200,000 families out of poverty. Meanwhile, the richest 10 per cent would contribute around £40 per week extra in tax.

Second, the proposal is entirely self-funding. The savings made from abolishing the personal allowance, as well as reduced spending on means-tested benefits driven by the boost in disposable incomes for the poorest, cover the full costs of the new weekly payment and the increase to child benefit.

A new guaranteed minimum income for a recession

Third, the policy significantly improves the UK’s recession-fighting toolkit. Because the new money would be retained by everyone whether in or out of work, it would provide a new guaranteed minimum income during recession. The Government could also increase the allowance temporarily during a recession if required, helping to maintain spending and livelihoods and aiding economic recovery.

At this week’s Spring Statement, the Chancellor Philip Hammond will likely remind us again that April will mark the completion of the Conservative flagship manifesto commitment to increase the personal allowance to £12,500. He will likely describe it as a victory for the UK’s working poor.

When he does this, we would do well to remember who is truly benefiting from the Government’s handout, how much it is costing society and the alternatives that can and should be explored.

Alfie Stirling is Head of Economics at the New Economics Foundation