New PM weighs raising tax-free income threshold amid fiscal drag pressure

Andy Burnham weighed raising the UK’s £12,570 tax-free income threshold, saying the frozen allowance was “the thing I heard the most on the doorsteps” during the Makerfield by-election campaign. The issue matters because official GOV.UK documents show the personal allowance and basic rate limit were frozen from 6 April 2022 to 5 April 2026, and later legislation kept open the option of holding them in place until 5 April 2031.

That freeze has become a live pocketbook issue as wages and prices rise. More workers are being pulled into income tax, or into higher tax bands, without any headline rise in rates, a process widely described as fiscal drag. For a low earner on £15,000, the current threshold leaves £2,430 taxable, creating a £486 income tax bill at 20 per cent. If Burnham lifted the allowance to £18,000, that worker would stop paying income tax altogether.

The gains rise quickly for people a little further up the pay ladder. Someone on £25,000 now pays tax on £12,430 of income, or £2,486 a year. At a £18,000 threshold, the tax bill would fall to £1,400, saving £1,086. A worker on £40,000 would also save £1,086, because the extra £5,430 of income would no longer be taxed at the basic 20 per cent rate. The policy would therefore hand the same cash gain to many ordinary earners, which is why it is politically attractive.

The catch is that the same move would cost the public finances heavily, and Burnham has already acknowledged that changing the threshold would be difficult. He has hinted that taxes on the better off could go up, and said there was “some room” for movement on tax more generally. A higher personal allowance would also leave the government with a harder choice: either raise other taxes, trim spending, or accept a bigger hole in the budget. That is why a promise that sounds simple to millions of workers becomes much harder once it meets the arithmetic of the tax base.