Prime Minister Andy Burnham has been cautioned that his proposed increase to the personal tax-free allowance could backfire, creating a new tax trap for higher earners while delivering only a modest benefit to most workers.
Proposed Allowance Increase
Burnham, who also leads the Labour Party, confirmed he is considering raising the HMRC personal tax-free allowance to £13,070. This would mean an extra £500 of income tax-free for workers, increasing from the current £12,570 threshold.
However, Dan Neidle, a tax expert from Tax Policy Associates, argues that this policy is poorly targeted and could introduce unintended consequences for the tax system.
Criticism from Tax Expert
Neidle described the proposal as a "broad but extremely shallow tax cut." According to his analysis, the increase would result in a £140 annual tax saving for most basic-rate taxpayers — equivalent to just £2.70 per week. Higher-income individuals would benefit slightly more, receiving around £240 a year.
"The same brilliant advantage of delivering a tax cut to every taxpayer turns out to spread the tax cut very thinly," Neidle said.
New Tax Trap Warning
More concerning, Neidle highlighted a technical flaw: raising the personal allowance creates a new "£126,000 tax trap." Currently, the personal allowance is reduced by £1 for every £2 earned above £100,000, disappearing entirely at £125,140 — the point where the 45% additional rate begins.
With a larger allowance, the clawback extends beyond £125,140, overlapping the additional rate band. This creates a marginal income tax rate of 67.5% between £125,473 and £126,140, or 69.5% including employee National Insurance.
"In that overlap each extra £1 of income is taxed at 45%, and costs 50p of allowance which is itself taxed at 45%," Neidle explained.
Potential Fix
Neidle suggested a straightforward remedy: moving the additional rate threshold upward as well. "It's peculiar that a Labour chancellor could increase the additional rate threshold, but in this case, doing anything else seems like a bad mistake," he added.
Chancellor John Healey would need to consider this adjustment to avoid the unintended high marginal rate. The proposal remains under consideration, with Burnham and Healey yet to announce a final decision.
