With last week’s announcement of a General Election on 4th July, the TaxWatch team have been looking at tax related pledges coming out of the main UK political parties. The first of note is the Conservative Party’s announcement of a new age-related Personal Allowance increasing in line with the triple lock on the State Pension. Overall, TaxWatch concludes this is a retrograde step for tax administration and compliance purposes, and furthermore would exacerbate unequal tax treatment of incomes across the generations (given any employment earnings of workers beyond State Pension age are already exempt from National Insurance primary contributions).
Of course the concept of the Personal Allowance varying with the age of the taxpayer isn’t a new concept at all…. The Conservative-LibDem coalition Government in the early 2010s effectively abolished the previous iteration when the then Chancellor gradually increased the main Personal Allowance for all taxpayers, aligning it with the most generous age related allowances. At the time this was heralded as a tax policy ‘simplification’ given that it removed the complicated taper that had operated at the time for wealthier older taxpayers. A good summary of the history of these developments was published in this 2019 House of Commons Library report.
The now abolished Office for Tax Simplification concluded that there was a high priority to reforming age related personal allowances, given the lack of policy justification for them in the modern tax regime and their existence was poorly understood and complex for taxpayers to claim.
Having previously made a conscious effort to remove age related allowances the proposal to re-introduce them linked to the state pension triple lock seems out of kilter, and contrasts markedly with the frozen income tax thresholds for other UK taxpayers. How the UK tax and pensions systems interact is an area that needs careful consideration and reform, but the issues are more complex and harder to solve than this proposal suggests.
