Proposal for Linking Personal Tax-Free Allowance to Inflation: A Necessity for Fair Tax Policy
In recent weeks, a compelling petition has gained traction among UK taxpayers, highlighting a critical issue: the stagnation of the personal tax-free allowance and its implications for household finances amid rising inflation. This initiative advocates for aligning the increase of tax brackets with a relevant inflation index, such as the Consumer Price Index (CPI), to mitigate what is effectively a hidden tax—often termed a “stealth tax.”
Understanding the Current Tax Landscape and Its Challenges
Presently, the UK government maintains a freeze on the personal allowance and income tax brackets until 2028. While this policy may simplify fiscal planning, it inadvertently imposes a financial burden on lower to middle-income households. As inflation erodes purchasing power, many taxpayers find themselves pushed into higher tax brackets without any formal adjustment to account for increased living costs. This phenomenon leads to higher tax liabilities despite stagnant or modestly increasing wages.
The Impact of Inflation on Taxation
Recent inflation data underscores the urgency of addressing this issue. Since 2022, inflation has surged to approximately 14%, with projections estimating a 3.7% increase in 2025 alone, according to the Bank of England’s May 2025 Monetary Policy Report. If these trends persist or accelerate, by 2028, the cumulative inflation could result in a 20% reduction in the real value of the personal allowance if it remains static. Consequently, taxpayers may encounter a significant rise in “stealth taxes,” effectively paying higher taxes without explicit legislative changes.
The Hidden Cost of Stagnant Allowances: A tabular illustration
To contextualize this, consider the following illustrative scenarios that project median income growth alongside inflation:
| Scenario | Median Annual Salary | Tax-Free Allowance | Taxable Income | Basic Rate Tax | Higher Rate Threshold | Total Tax Paid | Net Income After Tax | Estimated Stealth Tax on Income |
|—————————|———————-|——————–|—————-|—————-|————————|—————-|———————-|———————————-|
| 2022 Actual | £33,000 | £12,570 | £20,430 | £4,086 | £37,700 | £4,086 | £28,914 | – |
| 2025 (inflation adjusted) | £37,430 | £12,570 | £24,860 |