Prime Minister Andy Burnham faces mounting pressure to lift the freeze on the personal allowance, with questions arising about its value in today’s terms had it adjusted for inflation. The personal allowance, the threshold at which income tax begins, has remained stagnant at £12,570 since 2021. This static figure has resulted in more individuals being brought into the tax net or pushed into higher tax brackets as their incomes rise.
The current plan is to keep the personal allowance frozen until at least 2031. While acknowledging public frustration over the freeze, the Prime Minister acknowledged the difficulty of implementing changes given the prevailing financial constraints. However, on Wednesday, Burnham indicated that there is no definitive commitment to alter the freeze at present but hinted that the matter could be revisited later in the year during the Budget announcement, for which a date is yet to be set by the new Chancellor, John Healey.
The personal allowance signifies the income threshold at which most individuals commence paying income tax. Earnings exceeding this threshold attract the basic 20% income tax rate. The higher 40% rate applies to incomes above £50,270, while the additional 45% rate kicks in for earnings surpassing £125,140.
According to analysis by investment platform AJ Bell, had the personal allowance kept pace with inflation, it would have reached approximately £16,072 for the tax year 2026-27 and £17,380 by 2029-30. Charlene Young, a senior pensions and savings expert at AJ Bell, noted that failing to adjust the personal allowance for inflation is already costing taxpayers around £700 annually. If the freeze persists until 2030-31, basic rate taxpayers could stand to lose about £960, subject to wage and inflation fluctuations in the interim.
Despite the potential unfreezing of the personal allowance, Young cautioned that it is improbable for it to be fully reinstated in real terms without substantial adjustments. She highlighted the importance of meaningful increases and indexing the personal allowance to inflation to prevent taxpayers from feeling short-lived relief.
AJ Bell suggests that a £500 rise in the personal allowance could save basic rate taxpayers £100 on their yearly tax bill. Young emphasized that the extent of the hike directly impacts potential tax savings and creates fiscal challenges for Healey. HMRC estimates that every £100 increase in the allowance costs an average of £1 billion annually, indicating that a £500 raise could incur a cost of around £5 billion.
