Andy Burnham is reportedly considering a £100 tax cut for basic-rate taxpayers earning under £50,270 in his first Budget as Prime Minister. According to investment platform AJ Bell, the new Labour leader and Chancellor John Healey may increase the personal allowance, which has been frozen at £12,570 since 2021.
Potential £500 Personal Allowance Increase
Raising the personal allowance by £500 would reduce income tax bills by £100 for most basic-rate taxpayers. Charlene Young, a senior analyst at AJ Bell, explained: “Raising the personal allowance by £500 could give basic rate taxpayers £100 off their annual tax bill.” However, she cautioned that larger hikes would increase the fiscal burden. “The more it’s hiked, the bigger the potential tax saving, and the bigger the fiscal hole Healey needs to fill. HMRC estimates that every £100 increase in the allowance costs around £1 billion a year on average, meaning a £500 hike could cost around £5 billion,” Young added.
Impact on Higher Earners
The tax cut would not benefit individuals whose personal allowance is tapered, which kicks in when adjusted net income exceeds £100,000. For every £2 earned above this threshold, £1 of the personal allowance is lost, creating a 60% marginal income tax rate on earnings between £100,000 and £125,140. This taper threshold has been frozen since its introduction in 2010. Young warned that the marginal tax rate could rise further if the additional rate threshold is not adjusted. “The marginal tax rate could reach 67.5% in England and Wales, or 75% if the rumoured 50% additional rate threshold is implemented too. In Scotland, where bands and rates are set separately, it could hit 72% on a slice of income above £125,140,” she said.
Consideration of a 50% Additional Rate
Alongside the personal allowance increase, Burnham is also said to be weighing the reintroduction of a 50% additional rate of income tax to fund spending pledges. Currently, the top rate is 45% on earnings over £125,140 (48% in Scotland). However, historical evidence suggests that higher rates may backfire. The 50% rate was first introduced in 2010 by the then Labour government but was later cut after HMRC analysis showed it generated far less revenue than expected. Young noted: “Pushing the rate above 45% can trigger behavioural changes that significantly erode the expected revenue, raising questions over whether it would be anything more than a performative tax rise on the highest earners.”
HMRC’s 2012 review found that the behavioural response to the 50% rate was greater than assumed, slashing the expected yield from £2.6 billion to just £0.6 billion. “This is solid evidence that while a policy might offer an eye-catching headline, getting the numbers to stack up is a much larger challenge than supporters are often willing to acknowledge,” Young concluded.
