In the wake of Andy Burnham's ascension to the role of prime minister, one of his key priorities is addressing the pressing cost-of-living crisis. Among the potential policy shifts on the table is a personal allowance threshold adjustment, a move that could provide some relief to households grappling with rising expenses.
The personal allowance, which determines the income level at which individuals begin paying taxes, has been stagnant at £12,570 for five years. This freeze has inadvertently led to more people being pulled into higher tax brackets as wages naturally increase with inflation.
So, what could a lift in the personal allowance mean for taxpayers? While the details of Burnham's plan remain elusive, we can explore a couple of potential scenarios.
One option is to align the personal allowance with the Consumer Price Index (CPI) inflation figure, which for September 2025 was 3.8%. This would increase the personal allowance by approximately £480, resulting in a taxable income of £21,950 for someone earning £35,000. This change would save the individual £96 per year, a modest but welcome boost.
Alternatively, Burnham could opt for a more substantial increase by adopting the state pension triple lock policy, which would raise the personal allowance by 4.1% based on 2025 wage growth figures. This scenario would provide a £104 saving for our basic taxpayer example, or £145.60 in total including National Insurance.
However, these potential tax cuts come at a cost. According to HMRC estimates, the loss of tax revenue could range from £4.5bn to £5.5bn annually. Tax expert Dan Neidle has described this as a "bad tax cut", pointing out that a 1p employee National Insurance cut would save the average worker £250 a year at the same cost to the Treasury.
The question then arises: where will this lost revenue be recouped? Burnham has previously suggested a potential increase in additional-rate income tax, which could offset some of the lost revenue.
Personal finance expert Kate Steere raises an intriguing point: "As we know, there is no such thing as free money. Is this a case of relief today only to be hit elsewhere tomorrow?" She suggests that Burnham's proposed replacement of council tax with an annual property tax could negate the benefits of the personal allowance increase for many homeowners.
In conclusion, while a personal allowance increase may provide some immediate relief to taxpayers, it's essential to consider the broader economic implications and potential trade-offs. As Burnham navigates these complex tax considerations, the question of whether the benefits will truly trickle down to the people remains open for debate.
