Labour is under growing pressure to slash taxes after the Liberal Democrats unveiled plans for £17billion in income tax cuts if they enter government.
But leader Sir Ed Davey claimed the only way to fund his tax cuts is by reversing Brexit and taking Britain back into the European Union’s orbit.
The Lib Dem leader said the party would raise the tax-free personal allowance from £12,570 to £15,000, meaning 2.5 million people would pay no income tax at all.
The proposals require the party to strike a deal with the EU in the first year of the next parliament with tax cuts then coming a year later – still potentially more than four years away.
In a speech at his party’s conference in Brighton, Sir Ed said the Lib Dems would then go further by raising the higher rate tax threshold – the 40p band – from £50,270 to £56,000 and increase the rate at which people lose their personal allowance from £125,140 to £130,000.
The party said its tax plans would take 2.5 million of the lowest paid people out of paying any income tax at all, and take 760,000 people out of the 40p tax band. It added that its plans would save millions of people £680 a year.
However the bulk of the Lib Dems’ proposed tax cuts would only come by the end of the next parliament – so potentially up to eight years away depending on when a general election is held.
The party said Sir Ed’s tax cutting plans would cost £17billion in the fifth year of the next parliament and be funded by growing the economy through membership of the EU single market and a customs union with the bloc.
Liberal Democrat leader Sir Ed Davey annouced plans for £17billion in income tax cuts – although the bulk of the cuts would only come into effect in up to eight years
Sir Ed claimed the only way to fund his tax cuts is by reversing Brexit and taking Britain back into the European Union’s orbit
Sir Ed said: ‘Fixing our relationship with Europe is the only way to get our economy back on track.
‘And we are fighting to do just that. To put Britain back where it belongs. Back at the heart of Europe.’
He added: ‘Last year, I set out our plan for a new customs union, to slash the Brexit red tape.
‘Now I’m going further, because this moment demands it. Not just a customs union, but joining the single market too.
‘Bringing down those barriers to trade. Breathing new life into our economy. And bolstering our collective security too.’
The personal allowance, which is the amount you are allowed to earn until you begin paying income tax, has been frozen at £12,570 since 2021.
Under current government plans, the long-running freeze is due to extend until 2031 despite a growing clamour for the Treasury to end the ‘stealth’ raid on Brits.
Under what is known as ‘fiscal drag’, millions of Britons have been dragged deeper into the tax system due to the freezing of the personal allowance and income tax thresholds in recent years.
Both Labour and Tory chancellors have been accused of ‘stealth taxes’ by failing to increase allowances and thresholds in line with earnings growth prompted by the cost-of-living crisis.
But under the Lib Dem proposals, the tax-free allowance would be raised from £12,570 to £15,000 in the second year of the next parliament, with the party claiming this would be funded by the growth achieved by joining the EU single market.
It comes after Reform UK announced a similar policy at their conference earlier this month, which they said would be funded by slashing £22billion from the welfare bill.
And shortly before becoming Prime Minister, Andy Burnham said the ‘frustration about the personal allowance’ he heard while campaigning in the Makerfield by-election was ‘lodged in my mind’.
But after entering Downing Street, he later ruled out an immediate commitment to changing the tax-free personal allowance.
The Lib Dem pledge means that both Sir Ed’s party and the Tories are now promising to cut taxes while Labour has raised the tax burden to a post-war record – and still looks set to come back for more.
While Kemi Badenoch’s party has vowed to scrap the tourist tax, stamp duty, reverse the Family Farm Tax, and is exploring ways to abolish inheritance tax, Labour has introduced a new levy on overnight stays and ministers appear to be laying the groundwork for more tax rises at next month’s Budget.
Sir Ed told delegates gathered in Brighton on Monday: ‘Look what’s happened over the last few years – because of the lack of growth.
‘Desperate for another source of money, governments – both Conservative and Labour – have taken it out of people’s pockets.
‘How? By freezing the tax-free personal allowance. Raising income tax by stealth. Taking hundreds of pounds more out of the payslips of ordinary people, every year.’
He said that Lib Dems’ tax cutting proposals would be ‘trusting people to spend their own money, not telling them the state knows best’.
‘Our liberal approach is what is needed again today,’ Sir Ed added. ‘So I’m announcing our plan to raise the tax-free personal allowance to £15,000.
‘Taking 2 million more people out of paying tax altogether, and giving most taxpayers a £680 tax cut. Real money, back in people’s pockets.’
However the Tories hit out at the Lib Dems’ announcement, accusing the party of suffering from ‘collective amnesia’ and ‘trying to shift the blame onto a vote that happened a decade ago’.
Tory deputy leader Alex Burghart said: ‘Ed Davey has forgotten that you have to pay for access to the Single Market and Customs Union, giving up control both of your borders and your trade policy as well as your cash.
‘He wants to turn back the clock, taking us back to 2016. The Conservatives, in contrast, are focused on taking our country forward, and on getting Britain working again, including by setting out tax cuts that are actually costed.’
It comes after economists said last week that the warning lights are now flashing red over the parlous state of Britain’s economy.
Official figures showed inflation was 3.1 per cent in the year to August, up from 2.9 per cent the previous month, on the back of a surge in fuel prices.
And economists are now forecasting as many as four Bank of England rate rises in the next 12 months amid a worsening global outlook.
Government borrowing costs have also soared in recent weeks, hitting a 28-year high amid concern about Mr Burnham’s spending plans.
The Prime Minister and Chancellor have begun to adopt a more sombre tone about the state of the public finances ahead of Mr Burnham’s first Budget as PM on October 28.
Last week the Prime Minister admitted the Budget will ‘be challenging’ as the figures showed war in the Middle East has pushed up inflation and raised the Government’s borrowing costs. But Mr Burnham insisted he was prepared to take ‘difficult decisions’ on the economy.
