Prime Minister Andy Burnham has indicated he may consider raising the personal tax-free allowance, a move that could restore thousands of pounds to taxpayers' pockets. The current freeze on the allowance, set at £12,570, means individuals are losing out on £3,500 compared to if it had kept pace with inflation, according to investment platform AJ Bell.
Burnham's comments on the personal allowance
Speaking to journalists shortly after taking office, Burnham said he was 'looking at' the possibility of changing the income tax personal allowance. The Labour leader said: "There is no commitment at this point to change, but we will look at that at the budget."
However, his government has since distanced itself from any immediate change, with no firm commitment announced. The personal allowance is the amount of income an individual can earn before paying income tax, and it is typically uprated annually in line with inflation.
The freeze and its impact
The allowance was frozen at its April 2021 level of £12,570 by then-Chancellor Rishi Sunak, with the freeze initially set to last until April 2026. This was later extended by Jeremy Hunt and then Rachel Reeves, meaning the allowance will now remain at £12,570 until April 2031.
AJ Bell calculates that if the allowance had kept pace with inflation, it would now stand at £16,072 for the 2026/27 tax year – a difference of £3,502. This represents a significant real-terms cut in the amount people can earn tax-free.
Retirees face a growing squeeze
Des Cooney, from Axis Financial Consultants, highlighted the particular pressure on pensioners. He said: "The full new State Pension has risen to £241.30 a week this year, which works out at roughly £12,548 over 52 weeks. Against a Personal Allowance of £12,570, that leaves virtually no headroom before other taxable retirement income starts creating an Income Tax liability."
Cooney added: "With the Personal Allowance now set to remain frozen until 2031, that squeeze is no longer a distant concern. It is something people approaching retirement need to factor into their planning today."
The triple lock effect
He also warned that the State Pension triple lock could create a false sense of security. "People may see their State Pension increasing each year under the triple lock and assume that the whole increase improves their spending power," he said. "In reality, as more of their total income becomes taxable, part of that increase can effectively be handed back through Income Tax."
With the personal allowance frozen for the foreseeable future, many retirees and workers are facing a higher tax burden than anticipated. Burnham's comments suggest a potential review, but any change remains speculative until the budget announcement.
