Prime Minister Andy Burnham is facing calls to increase the personal allowance, with questions arising about its value in today’s context if it had kept pace with inflation.
The personal allowance, which denotes the threshold before income tax kicks in, has remained at £12,570 since 2021. This static figure has resulted in more individuals being pushed into the tax-paying bracket or facing higher tax rates as their earnings rise.
Currently, the personal allowance is slated to remain unchanged until at least 2031. While acknowledging public frustration over the freeze, the Prime Minister highlighted the challenging financial landscape that complicates any potential alterations.
In a recent statement, Mr. Burnham mentioned that there is no current commitment to modify the personal allowance but hinted at a possible review later in the year during the Budget announcement, yet to be scheduled by the new Chancellor, John Healey.
The personal allowance outlines the earnings ceiling before income tax obligations commence. Income surpassing this threshold incurs the standard 20% income tax rate. For incomes exceeding £50,270, the higher 40% rate is applied, and earnings over £125,140 trigger a 45% tax rate.
Analysis by investment platform AJ Bell indicates that had the personal allowance kept up with inflation, it would have reached approximately £16,072 by the 2026-27 tax year and £17,380 by 2029-30.
Charlene Young, a senior pensions and savings expert at AJ Bell, pointed out that if the personal allowance had been inflation-adjusted, it would now stand at over £16,000. The current freeze is estimated to cost taxpayers around £700 annually, potentially escalating to a £960 loss for basic rate taxpayers by the end of 2030/31, depending on wage and inflation fluctuations.
Despite discussions on potentially unfreezing the personal allowance, Young cautioned that a full restoration to its real value seems unlikely without significant adjustments. She emphasized the importance of meaningfully increasing the threshold and linking the personal allowance to inflation to prevent taxpayers from feeling shortchanged.
According to AJ Bell, a £500 raise in the personal allowance could save basic rate taxpayers £100 annually. Young explained that the higher the increase, the greater the potential tax savings, but also the larger the financial gap that Chancellor Healey would need to address.
HMRC estimates suggest that a £100 increment in the allowance costs around £1 billion per year on average, indicating that a £500 raise could amount to around £5 billion in expenses.
