Tory 'tax free minimum wage' plans to cost £3.7bn

Conservative plans to push up the income tax personal allowance to at least £12,500 by 2020 - and legislate for a "tax free minimum wage" - would cost at least £3.7bn a year, according to an independent think-tank.

The pledge to increase the personal allowance in line with the national minimum wage while guaranteeing to raise it to £12,500 by 2020 was described as a "double lock" by the Institute for Fiscal Studies.

The policy would "continue to reward hard work" according to the manifesto, which said it would lift about 1m people out of income tax altogether and cut bills for 30m people.

The promise of a big increase in the personal allowance is building on one of the coalition government's flagship policies. Despite the popularity of the policy, the decision to lift millions of people out of income tax has been criticised for weakening the public finances, increasing reliance on a smaller number of taxpayers, eroding the social contract and for helping richer households more than low earners.

The increases in the personal allowance will mostly benefit working-age families in the upper half of the income distribution, according to the IFS.

Frances O'Grady, TUC general secretary, said the latest manifesto pledge was not aimed at the low paid. She said: "This is not a manifesto for minimum wage workers. Most already pay no income tax."

The CBI, representing business, said that a better priority would be to increase the threshold at which individuals pay national insurance contributions, which is significantly lower than the income tax personal allowance.

The Conservatives said that, if elected, they would apply the new "tax free minimum wage" law from the first Budget after the general election.

Stuart Adam, of the IFS, said the move "appears to be outsourcing tax policy to the Low Pay Commission". It would give the Low Pay Commission, which makes recommendations on the minimum wage, influence over the personal allowance - although its recommendations do not have to be accepted by a government and parliament could vote to break the link with the minimum wage.

The idea of a "tax free minimum wage" is based on an individual working 30 hours a week, which is the definition of "full time work" in the criteria for tax credits. The minimum wage is on course to rise to £8 an hour by 2020. Only if it exceeded £8 would the personal allowance rise above £12,500 in the next parliament.

Mr Adam said the cost estimate of the £12,500 allowance was based on keeping the higher rate threshold unchanged and would rise to £5.6bn if plans to increase the higher rate threshold to £50,000 were taken into account.

The government increased the personal allowance to £10,600 in the 2015-16 financial year at a cost of about £8bn a year, net of reductions to the higher rate threshold. The personal allowance is now £2,835 higher than the £7,765 it would have been if it had risen with inflation.

Commenting on the manifesto proposals, Paul Johnson, director of the IFS, told Sky News that even before considering the costs of policies such as the personal tax allowance, there would be a need for tens of billions of spending cuts or tax increases if the Conservatives intended to get the overall budget into surplus by 2018.

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