- Prime Minister Andy Burnham shelved the personal allowance increase, keeping the current threshold at twelve thousand five hundred seventy pounds.
- The freeze on tax-free income will remain until the next Budget while the government prioritizes fiscal stability.
- A planned electricity bill VAT cut is scheduled to provide household relief starting October first, twenty twenty-six.
Andy Burnham has shelved a near-term increase to the UK’s £12,570 threshold, saying the change is not part of his administration’s initial cost-of-living plan.
On Monday, Burnham said the issue would be “looked at” in the next Budget. He also warned that a change would be “difficult, given the financial circumstances in which we find ourselves.”
People close to the prime minister later said there were “no plans” to change the personal allowance “in the short term.” The decision leaves the tax-free threshold frozen while ministers consider wider tax and spending choices.
Free toolSubstantial Presence Test CalculatorBurnham had earlier described the freeze as “the thing I heard the most on the doorsteps.” He said the issue remained “lodged in my mind.”
The Budget will determine whether that concern becomes policy. No immediate increase has been promised.
The allowance remains frozen as wages rise
The allowance has stood at £12,570 since 2021. When earnings rise but the threshold does not, more income can become taxable without any change to the headline tax rates.
Burnham has committed to Labour’s 2024 manifesto promise not to raise the basic, higher, or additional rates of income tax. Adjusting the allowance would therefore offer ministers one way to change tax bills without altering those rates.
The Treasury cost could be substantial. The Institute for Fiscal Studies has estimated that unfreezing the threshold would cost £8.5 billion to £9 billion a year.
A separate assessment by Tax Policy Associates put the cost of an increase designed to provide meaningful relief at £6 billion. That proposal would deliver roughly £140 per year to a basic-rate taxpayer.
The figures point to a difficult trade-off. The relief for an individual taxpayer could be limited, while the cost to the Exchequer would run into billions.
| Measure | Figure |
|---|---|
| Current allowance | £12,570 |
| Estimated inflation-linked allowance | £16,070 |
| Approximate gap against the current allowance | £3,500 |
| Estimated annual benefit for a basic-rate taxpayer under one proposed increase | £140 per year |
| Estimated annual cost of ending the freeze, according to the Institute for Fiscal Studies | £8.5 billion to £9 billion a year |
Tax Policy Associates estimated that inflation would have lifted the allowance to approximately £16,070. The difference between that figure and the current level is about £3,500.
A basic-rate taxpayer currently pays an estimated £700 more per year than they would if the allowance had tracked inflation, according to the same analysis. That calculation reflects fiscal drag, as pay increases move more earnings into taxation.
The freeze also affects some pension savers. People earning below the allowance do not receive tax relief on pension contributions, creating a separate pressure for ministers to address.
Other relief measures will arrive before any tax change
Burnham and Chancellor John Healey have announced a VAT cut on electricity bills from October 1, 2026. They presented the measure as a way to provide “breathing space.”
That relief has a firm date. Any change to the allowance remains tied to the next Budget.
The government has also introduced a £2 bus fare cap and pledged to end rough sleeping. Those measures compete for attention and funding with the proposed tax change.
Healey has said fiscal responsibility is central to economic stability and national security. He also said the prime minister and chancellor had discussed working “in lockstep to meet the fiscal rules.”
Louise Hellem, chief economist at the CBI, said businesses still faced the same growth challenges despite the change at No. 11.
“Business will be conscious that whilst there is now a new occupant at No. 11, the same challenges to unlock growth remain. That means staying committed to established fiscal rules”
The allowance proposal is therefore being considered alongside decisions about household support, growth policy and the government’s fiscal rules.
Alternative tax proposals target wealth and banks
Some proposals in the wider debate would raise money from wealth rather than reduce income tax. Academics Gabriel Zucman and Ben Tippet have urged the government to consider a 2% wealth tax on households with more than £100 million in assets.
They estimate that the measure could raise £10 billion annually. That would exceed the annual cost estimated by the Institute for Fiscal Studies for unfreezing the allowance, although the proposals would apply to different groups.
Bank taxation has also drawn a warning from business. JP Morgan chief executive Jamie Dimon said there would be “consequences” if the government increased taxes on the banking sector to fund its industrial strategy.
Those competing ideas place household tax relief within a broader revenue debate. Ministers must weigh the cost of raising the allowance against other ways to support living standards and finance government priorities.
The Budget will test Burnham’s initial retreat
Reports on July 22 indicated that the threshold proposal had been sidelined. Markets responded to Burnham’s comments about “flexibility” in fiscal rules, with slight fluctuations in gilt yields.
The move does not rule out a later review. Burnham has said the issue will be examined in the Budget, while the people close to him have ruled out a short-term announcement.
Households therefore have a nearer-term date to watch in the electricity measure than in income tax reform. The VAT cut is scheduled for October 1, 2026.
The allowance remains at £12,570 as ministers prepare the next set of fiscal decisions.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
