“We have provided record increases to the personal allowance, meaning that a person working full time on the minimum wage has seen a £1,000 reduction in their tax.”
“We have reduced the income tax and national insurance paid by someone on the average wage by about £1,100 a year.”
At Prime Minister’s Questions on 7 June, Deputy Prime Minister Oliver Dowden claimed that increases to the personal allowance (the amount someone can earn without paying income tax) mean “a person working full time on the minimum wage has seen a £1,000 reduction in their tax”.
This is potentially misleading, because the phrase “£1,000 reduction” could be understood in different ways. Mr Dowden did not make clear that the figure is a counterfactual comparison with what someone on minimum wage would pay this tax year had tax thresholds risen with inflation since 2010, not an estimate of the actual change in the amount of tax paid compared to 2010/11, or another year.
The chancellor Jeremy Hunt made a somewhat similar claim in a column for the Telegraph last month, in which he said the government has “reduced the income tax and national insurance paid by someone on the average wage by about £1,100 a year”.
When we asked the Treasury about both these claims, it told us that someone on the average wage will pay over £1,000 less in income tax and national insurance contributions (NICs) this tax year than if tax thresholds had gone up with inflation since 2010. The same would also apply to someone on the minimum wage.
But neither Mr Dowden nor Mr Hunt explained that the £1,000/£1,100 figure is based on a counterfactual estimate. In cash terms someone earning the minimum or the average wage in 2023/24 can actually expect to pay more in tax than they would have in 2010.
Ministers should use official information transparently and with all relevant context and caveats when a claim is first made, and quickly rectify oversights when they occur.
It’s worth noting that the figures discussed in this piece are not relevant to Scotland, where income tax is set differently to the rest of the UK.
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While we’ve not seen the Treasury’s exact calculations, it is broadly correct that, had the personal allowance and the national insurance primary threshold both increased in line with inflation each year since 2010, those paying the basic rate of income tax and class 1 NICs (including both those on the national living wage, and those earning the “average salary”) would have had to pay over £1,000 more this year then they will actually pay.
The personal allowance in 2023/24 is £12,570—the same level as the primary threshold for NICs.
Under these thresholds, someone earning the median full-time salary of £33,000 (as of 2022) could expect to pay around £6,550 in income tax and national insurance for the current tax year.
In 2010, when the Conservatives entered government, the personal allowance was £6,475, while the NICs primary threshold was £5,720.
Had these thresholds increased each year by default in line with inflation, someone earning the median salary would be paying around £1,100 more per year in income tax and national insurance (as would someone earning the national living wage of £10.42 per hour—approximately £20,000 per year, assuming an average working week of 37 hours—which Mr Dowden referred to).
The Treasury has not confirmed which inflation measures it used in its calculation. The personal allowance has been indexed to the Consumer Prices Index (CPI) since 2015/16, and the NICs primary threshold to CPI since 2012/13. Both were previously indexed to the Retail Prices Index.
How has the amount of tax paid actually changed?
What Mr Dowden and Mr Hunt both failed to make clear is that the £1,000 figure doesn’t reflect how the amount of tax and NI paid by someone on the minimum or average wage has actually changed while the Conservatives have been in government.
While we’ve not seen the Treasury’s full working, our broad calculations suggest that in cash terms, someone on either the minimum or average wage now pays more tax than someone in the equivalent position would have done in 2010.
In 2010, the National Minimum Wage stood at £5.93 per hour (around £11,000 per year for a full-time employee), while the median full-time annual salary was £25,882.
A full-time worker earning minimum wage would typically have paid around £1,600 in tax, with someone earning the median annual salary paying around £6,100.
In 2023/24, someone earning the minimum wage could typically expect to pay around £800 more in tax and NICs than in 2010, according to our rough calculations. And someone earning the median full-time annual salary could expect to pay around £450 more than someone earning the median salary in 2010.
However, it’s also worth noting that because tax thresholds have increased at a faster rate than the minimum or average wage, both groups are paying a smaller proportion of their earnings as tax.
We asked the Cabinet Office and the Treasury why Mr Dowden and Mr Hunt had phrased their claims in the way they did, but did not receive a response.
Threshold freezes will increase tax contributions
While it is true that above-inflation increases to tax thresholds have meant people are paying less in tax and NICs than they might have done otherwise, this is not expected to be the case going forward.
The personal allowance has been frozen since 2021, and is expected to remain frozen at the current level until 2027/28.
The national insurance primary threshold is also set to remain frozen at the current level until 2027/28.
The Office for Budget Responsibility estimates that the personal allowance freeze will mean its real terms value in 2027/28 will be equivalent to its value in 2013/14.
It also forecasts that the combined increased tax receipts from these and other personal tax threshold freezes will increase tax receipts by £29.3 billion a year—equivalent to a 4p increase in the basic rate of income tax by 2027/28—and will generate 3.2 million new taxpayers.
Image courtesy of Simon Dawson
