Prime Minister Andy Burnham has backed away from an initially considered increase to the income tax personal allowance, confirming the threshold will remain frozen at £12,570 until at least April 2031. This decision, articulated to his cabinet, prioritises 'fiscal discipline' over providing immediate tax relief to households.
What Changed and By How Much
The standard Personal Allowance, the amount of income an individual can earn before paying tax, has been fixed at £12,570 since April 2021. Prime Minister Burnham had initially indicated that the five-year freeze was 'a growing issue' for voters and was 'lodged in my mind' after hearing concerns on the doorsteps. However, he subsequently 'backed away from the idea,' citing the need for fiscal prudence.
The implications of this decision are substantial. According to consulting firm EY, every £100 increase in the personal allowance is estimated to cost the government approximately £1 billion. Unfreezing the allowance, as estimated by the Resolution Foundation, could cost £3.7 billion by 2029-30, rising to £14.4 billion if extended.
The Silent Tax Rise: Fiscal Drag
The continued freeze of income tax thresholds, against a backdrop of inflation and wage growth, is a mechanism known as 'fiscal drag.' This phenomenon effectively pulls more individuals into paying income tax, or into higher tax brackets, without any explicit change in tax rates.
The UK annual inflation rate, as measured by the Consumer Prices Index (CPI), stood at 2.8% in May 2026. The Bank of England projects CPI inflation to be 3.3% in Q3 2026. Meanwhile, median gross annual earnings for full-time employees were £39,039 in April 2025, a 4.3% increase from the previous year. As nominal wages rise, a static tax-free allowance means a larger proportion of an individual's income becomes taxable.
The Office for Budget Responsibility (OBR) projects the UK's overall tax burden to rise from 34.5% of GDP in 2024-25 to a post-war record of 38.5% of GDP by 2030-31. The freezing of tax thresholds is identified by the OBR as the primary driver of this increase.
Scenario: The 60% Tax Trap
For those with higher incomes, the impact of the frozen allowance is particularly acute. If your adjusted net income falls between £100,000 and £125,140, your personal allowance is reduced by £1 for every £2 earned above £100,000. This tapering creates an effective marginal tax rate of 60% within this band, escalating to 62% when National Insurance contributions are included.
What Critics Say
While the government emphasises fiscal discipline, the decision has drawn scrutiny. Dan Neidle, a tax expert from Tax Policy Associates, questioned the policy's effectiveness as a relief measure, noting that while an allowance increase applies to everyone, the tax cut it delivers is 'very small' relative to its cost. He suggested a £500 increase would cost around £6 billion.
Unions, including the Trades Union Congress (TUC) led by General Secretary Paul Nowak, advocate for alternative approaches. They urge the government to consider taxing wealth, such as equalising rates on capital gains and income, and increasing taxes on banks, rather than relying on fiscal drag to increase the tax take from middle earners.
What this means for you
With the personal allowance frozen, your take-home pay may feel the squeeze as your nominal income rises. It means that any pay rise you receive, even if it matches inflation, will see a larger proportion taxed than if the allowance had increased. This reduces your real disposable income, impacting your ability to save or manage ongoing cost-of-living pressures.
What to do right now
Given the continued freeze, it may be worth reviewing your financial situation:
- Assess your income: Understand how your gross income translates to net pay, especially if you anticipate a pay rise that could push you into a higher tax bracket or the 60% marginal tax band.
- Review your savings: Consider utilising tax-efficient savings wrappers. A Cash ISA allows you to save up to £20,000 per tax year completely tax-free. For first-time buyers under 40, a Lifetime ISA offers a 25% government bonus on contributions up to £4,000 per year, potentially adding up to £1,000 annually to your savings.
- Understand your Personal Savings Allowance (PSA): Basic rate taxpayers can earn up to £1,000 in interest tax-free, while higher rate taxpayers get £500. Any interest above these thresholds is taxable. For large sums, or if your interest earnings approach these limits, an ISA can be a more tax-efficient alternative to a standard savings account.
- Seek professional guidance: If your financial situation is complex, particularly with higher incomes or significant savings, independent financial guidance can help optimise your tax position.
When Effective
The freeze on the Personal Allowance at £12,570 is currently effective and scheduled to remain in place until at least April 2031.
Where to get help
For independent financial guidance, consider speaking to a qualified financial adviser. You can find regulated advisers through organisations such as the Financial Conduct Authority (FCA) website.
Sources
- Andy Burnham (July 2026) — Statements on personal allowance freeze
- EY — Cost estimate for personal allowance increase
- HMRC/GOV.UK — Personal Allowance details and tapering rules
- Office for Budget Responsibility (OBR) — Tax burden projections
- Bank of England — CPI inflation rates (May 2026, Q3 2026 projection)
- Office for National Statistics (ONS) — Median gross annual earnings (April 2025)
- Resolution Foundation — Cost estimates for unfreezing personal allowance
- Dan Neidle, Tax Policy Associates — Expert criticism of allowance increase policy
- Trades Union Congress (TUC) — Calls for wealth taxation
This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.