Income tax update due next week after calls to increase Personal Allowance to £20,000

An online petition urging for the personal tax allowance to be raised from £12,570 to £20,000 in order to assist low-income individuals "get off benefits and allow pensioners a decent income" is set to be debated by MPs in Parliament next week. This comes after the proposal garnered support from over 248,400 people across the UK.

However, a recent update from the UK Government regarding the potential impact of increasing the Personal Allowance to £20,000 seems to quash any hopes of seeing the income threshold freeze lifted before the planned rise with inflation in April 2028, reports the Daily Record.

In a written response to Labour MP Tanmanjeet Singh Dhesi, Treasury Minister James Murray stated that the UK Government "has no plans to increase the Personal Allowance to £20,000".

Mr Murray said: "The Government is committed to keeping taxes for working people as low as possible while ensuring fiscal responsibility and so, at our first Budget, we decided not to extend the freeze on personal tax thresholds. The Government has no plans to increase the Personal Allowance to £20,000."

He further explained that raising the Personal Allowance to £20,000 would "come at a significant fiscal cost of many billions of pounds per annum". He added that this would "reduce tax receipts substantially, decreasing funds available for the UK's hospitals, schools, and other essential public services that we all rely on".

The Treasury Minister said, "It would also undermine the work the Chancellor has done to restore fiscal responsibility and economic stability, which are critical to getting our economy growing and keeping taxes, inflation, and mortgages as low as possible. The Government keeps all taxes under review as part of the policy making process. The Chancellor will announce any changes to the tax system at fiscal events in the usual way."

Upcoming debates could signal changes in the wind for taxpayers, as Westminster Hall braces for a fiery session on Monday, May 12. MPs will champion their constituents' calls for a hike to the Personal Allowance, with proceedings drawing to a close with a Treasury Minister making the case for persisting with the current freeze until the conclusion of the 2027/28 financial year.

Alan David Frost, the mind behind the petition, is calling it downright wrong to tax pensioners on their State Pension when it exceeds the personal allowance threshold. He's convinced that bumping up the allowance would pump more money into the economy.

The 'raise the income tax personal allowance from £12570 to £20000' petition clearly outlines the benefactors: "We think this would help low earners to get off benefits and allow pensioners a decent income. We think it is abhorrent to tax pensioners on their State Pension when it is over the personal allowance. We also think raising the personal allowance would lift many low earners out of benefits and inject more cash into the economy creating growth."

The Treasury, responding to a petition's proposals on February 20, echoed Mr Murray's sentiment. It stated: "The Government is committed to keeping taxes for working people as low as possible while ensuring fiscal responsibility and so, at our first Budget, we decided not to extend the freeze on personal tax thresholds."

Furthermore, it was made clear that there are no intentions by the UK Government to raise the Personal Allowance to £20,000. The full response is available to read on the petitions-parliament website.

Weekly State Pension payments increased on April 7, however, people will not see an immediate increase as the contributory benefit is paid in arrears.

Full New State Pension

• Weekly payment: £230.25
• Four-weekly payment: £921
• Annual amount: £11,973

Full Basic State Pension

• Weekly payment: £176.45
• Four-weekly payment: £705.80
• Annual amount: £9,175

To check your own future State Pension payments, use the online forecasting tool on GOV.UK here.

In terms of taxation, individuals receiving the full New State Pension will generally be exempt from income tax. However, older residents garnering additional funds through employment or personal retirement plans may have a tax liability.

Typically, tax for most is deducted automatically via PAYE on employment income or on private pensions. Those not paying tax automatically should expect a tax bill from HMRC the subsequent summer, due for payment by January of the following year.

There's been a fair amount of conjecture about the number of pensioners who will be taxed before the Personal Allowance freeze ends. However, it's worth noting that out of the 13 million State Pensioners in the UK, around 8.51 million (65%) already pay some tax in retirement, so this isn't a new phenomenon.

With auto-enrolment in the workplace now in its 13th year, more individuals are set to benefit from increased income in retirement and will likely pay tax - typically deducted from their private pension.

It's crucial to understand that any tax paid in retirement is based on the amount of income earned above the threshold - not the total additional income. For instance, if someone has a total annual income of £13,000, they will pay tax on £430 - the amount above the £12,570 threshold. Those affected would then have to pay HMRC 19 per cent of their income above the threshold, which is the starter rate of tax in Scotland (20% in England).