Prime Minister Andy Burnham is facing pressure to adjust the frozen personal allowance in line with inflation. The current personal allowance, which determines one’s income tax threshold, has remained stagnant at £12,570 since 2021. This static figure has resulted in more individuals being pushed into tax-paying brackets as their incomes rise.
The personal allowance freeze is expected to persist until at least 2031, with the Prime Minister acknowledging public frustration over this issue. However, he has expressed the difficulty of implementing changes given the prevailing financial constraints.
Though there is currently no firm commitment to alter the personal allowance, Mr. Burnham mentioned the possibility of revisiting the issue during this year’s Budget discussions, which have yet to be scheduled by the new Chancellor John Healey.
According to analysis by investment platform AJ Bell, if the personal allowance had kept pace with inflation, it would have reached approximately £16,072 for the 2026-27 tax year and £17,380 by 2029-30. This inflation-linked adjustment would have mitigated the financial burden on taxpayers, saving them around £700 annually.
However, even if the personal allowance is eventually adjusted, it may not fully align with inflation rates, cautioning taxpayers against expecting significant relief. Charlene Young, a senior pensions and savings expert at AJ Bell, emphasized the importance of meaningfully increasing the threshold and indexing the personal allowance to inflation to prevent any false hopes among taxpayers.
AJ Bell suggests that increasing the personal allowance by £500 could potentially save basic rate taxpayers £100 on their yearly tax bill. Ms. Young highlighted that while such adjustments offer tax savings, they also pose fiscal challenges for the government. HMRC estimates that each £100 increase in the allowance incurs an average annual cost of £1 billion, indicating that a £500 raise could amount to around £5 billion in additional expenditure.