Labour is reportedly considering a major change to income tax that could deliver a significant cost-of-living boost to low-income households. According to reports, Prime Minister Andy Burnham and Chancellor John Healey are examining a rise in the personal allowance at the Budget in October.
The personal allowance is the amount someone can earn before they have to pay income tax. The level has been frozen at £12,570 since 2021, and the freeze has meant more households have been dragged into paying tax as their earnings have increased in recent years.
Potential boost for low earners and pensioners
The move would allow people to earn more before paying tax, bringing a major boost to some of the poorest households in the UK. The shake-up would also protect more pensioners from being pulled into paying tax for the first time.
Any decision would likely be announced at John Healey's first Budget on October 28. Andy Burnham has faced pressure since becoming Prime Minister to commit to increasing the personal allowance to boost living standards for some of the poorest families and pensioners. He has pledged to look at the issue at the Budget but has stressed there are no commitments.
Fiscal drag affecting more retirees
The full state pension is set to climb to around £13,000 from next spring under triple lock rules. Wages for low earners have also increased due to inflation and general pay rises, pushing more poorer households into paying income tax.
Derence Lee, finance expert at Shepherds Friendly, said: "With the personal allowance frozen at £12,570, each rise in the state pension increases the likelihood that more pensioners will be drawn into paying income tax for the first time.
"Even relatively small amounts of additional income, such as a private pension or part-time earnings, could then push them over the threshold.
"In effect, some pensioners may find that part of the future state pension increases are offset through taxation.
"While the triple lock remains important in protecting against rising prices, the freeze in tax thresholds means fiscal drag is likely to affect a growing number of retirees in the coming years."
Impact of the tax threshold freeze
The freeze in the personal allowance has been a key factor in the rise of fiscal drag, where more people are pulled into higher tax brackets as their incomes grow. The government is now reportedly looking at raising the personal allowance to address this issue.
The potential change would be a significant departure from the current policy, which has remained unchanged since 2021. If implemented, it could provide immediate relief to low-income households and pensioners who are facing increased tax burdens.
The decision is expected to be a central part of the Budget announcement on October 28, with the government under pressure to deliver on promises to improve living standards for the most vulnerable.
