Millions of workers could be handed a modest income tax cut at Andy Burnham’s first Budget – but experts warn it may prove too expensive with increases elsewhere.
Speculation is mounting that Prime Minister Andy Burnham and Chancellor John Healey are considering easing the long-running freeze on the personal allowance, which has been stuck at £12,570 since 2021 despite years of soaring inflation. A £500 increase in the tax-free allowance would save a basic-rate taxpayer £100 a year – a welcome boost for households squeezed by the cost of living.
But experts say such a move would leave a sizeable hole in the public finances at a time when many economists believe the Government is already running out of room to fund its spending promises.The pressure has intensified after ministers announced a string of expensive measures in recent weeks, including scrapping VAT on household electricity bills, introducing a £2 bus fare cap and cutting business rates for pubs.
Those commitments have fuelled widespread expectations that, despite talk of tax cuts, the Autumn Budget is more likely to contain tax rises or revenue-raising measures elsewhere to balance the books. Charlene Young, senior pensions and savings expert at AJ Bell, said lifting the frozen personal allowance would be hugely popular but would come with a hefty price tag.
She said: “Prime Minister Andy Burnham has hinted he wants to look at the frozen personal allowance at his inaugural Budget, increasing it to help ease cost of living pressures. While this would undoubtedly be immensely popular, it could prove an expensive tab to pick up for new Chancellor John Healey.”
The personal allowance has remained frozen since former Chancellor Rishi Sunak introduced the policy in 2021 to help repair the public finances after Covid. Successive governments extended the freeze, creating one of Britain’s biggest stealth tax raids as millions more workers have been dragged into paying tax or pushed into higher tax bands simply because wages have risen.
According to AJ Bell, had the allowance risen in line with inflation it would now stand at more than £16,000. That means the typical taxpayer is already paying around £700 a year more than they otherwise would.
If the freeze remains in place until 2030-31, a basic-rate taxpayer could ultimately be almost £1,000 worse off. Ms Young warned that even if ministers did announce a modest increase this year, it would barely scratch the surface of what households have already lost.
She said: “Unless the threshold is meaningfully increased and the personal allowance indexed to inflation again, taxpayers may be left feeling that a brief ray of sunshine in the end is a false dawn.”
Cost to the Treasury would quickly escalate
HMRC estimates every £100 increase in the personal allowance costs roughly £1 billion a year, meaning a £500 rise would cost around £5 billion annually.
Restoring the allowance fully to where it would have been had it kept pace with inflation could cost around £35 billion a year, making it one of the most expensive tax giveaways available.
Higher earners would also see little benefit
While they would receive the same £100 reduction, many have been hit much harder by the freeze in the 40% tax threshold, which remains fixed at £50,270. Had that threshold kept pace with inflation it would now be above £64,000, according to AJ Bell.
Someone earning £75,000 is estimated to be paying around £4,000 more tax each year because of the frozen higher-rate threshold. AJ Bell also warned of growing complexity higher up the income scale.
People earning more than £100,000 gradually lose their personal allowance, creating an effective 60% marginal tax rate across part of their income.
If ministers were also to introduce the rumoured return of a 50% top rate of income tax without changing those thresholds, effective marginal tax rates could climb to 67.5% in England and Wales, and 75% in some circumstances. Instead of changing income tax, AJ Bell says ministers could instead reduce National Insurance.
Cutting employee National Insurance by one percentage point would cost around £5.8 billion, but someone earning £35,000 would save around £225 a year – more than double the benefit from a £500 rise in the personal allowance. However, that option would not help pensioners because they do not pay National Insurance, making it politically more difficult.
AJ Bell also questioned reports that Burnham could revive the 50% additional rate of income tax, pointing to HMRC’s own analysis of the last 50p tax rate, which concluded it raised far less money than originally expected because wealthy taxpayers changed their behaviour.