Burnham Signals £12,570 Tax Threshold May Rise: A Boost for Millions

The UK’s tax landscape, often described as a labyrinth, is currently defined by a stark number: £12,570. This is the Personal Allowance, the amount of income you can earn before a penny of income tax is due. However, this figure, frozen since 2022, has become a silent tax raiser, a phenomenon known as fiscal drag. Now, Andy Burnham, the incoming Prime Minister, has signalled a potential shift, hinting that this crucial threshold may finally rise, offering a potential reprieve for millions.

The Silent Tax Rise: How the Freeze Works

For years, the Personal Allowance typically increased with inflation, a mechanism designed to prevent ordinary wage growth from pushing people into higher tax brackets purely due to rising prices. Not anymore. The £12,570 Personal Allowance, along with other income tax thresholds, was initially frozen by Rishi Sunak in March 2021 until April 2026. This freeze was then extended by Jeremy Hunt in Autumn 2022, and further by Rachel Reeves in the 2025 Budget, meaning it is now set to remain at £12,570 until at least April 2031.

This prolonged freeze is a powerful tool for the Treasury. As wages rise, even modestly, more of an individual's income becomes taxable, or they are pushed into higher tax bands. The Office for Budget Responsibility (OBR) estimates this policy will generate an additional £55.5 billion in revenue by 2030/31 – a sum equivalent to a 4p increase in the basic rate of income tax without any politician having to announce it.

"Many personal tax thresholds have been frozen in cash terms since April 2021, whereas previously most were due to rise in line with CPI inflation. The resulting 'fiscal drag' is set to raise significant sums as the average effective tax rate (total tax paid as a share of total income) rises more quickly over time." — Office for Budget Responsibility

Who is Affected by Fiscal Drag?

The impact of this freeze is widespread and growing. The OBR forecasts that by 2030/31, an additional 5.2 million people will be paying income tax who wouldn't have under previous indexing rules. Furthermore, 4.8 million more individuals are expected to move into the higher rate (40%) tax band, and 600,000 into the additional rate (45%) band. The proportion of taxpayers paying higher or additional rates is projected to jump from 15% in 2021 to 24% by 2030/31.

Consider the current inflation rate, which, as of June 2026, has fallen to 2.8% but is expected to rise again. While the Bank of England targets 2% inflation, even modest price increases erode the real value of the frozen allowance, effectively increasing your tax burden year on year.

Burnham's Signal: A Potential Reprieve

Andy Burnham, who becomes Prime Minister in July 2026, has indicated a willingness to address this. He stated that the frozen tax threshold was "the thing I heard the most on the doorsteps," acknowledging the public's frustration with the stealth tax. His signal suggests a potential departure from the current government's strategy, offering a glimmer of hope for millions struggling with the cost of living.

Mr. Burnham has also committed to the UK's fiscal rules and has pledged not to raise the headline rates of income tax, VAT, or National Insurance during this Parliament. This implies that any increase in the Personal Allowance would need to be funded through other means, potentially by "asking for a little more" from wealthier households, a strategy he has hinted at, aligning with his long-standing belief that the UK tax system over-taxes labour and under-taxes assets.

Scenario: What a Threshold Rise Could Mean for You

While the exact amount of any potential rise is yet to be determined, we can illustrate the impact. Let's assume, for argument’s sake, that the Personal Allowance were to rise by £1,000 from its current £12,570 to £13,570.

• Basic Rate Taxpayer (earning £30,000): You currently pay 20% tax on £17,430 (£30,000 - £12,570). If the allowance rose by £1,000, you would pay 20% tax on £16,430 (£30,000 - £13,570). This would save you £200 per year in income tax.
• Higher Rate Taxpayer (earning £60,000): You currently pay 20% tax on £37,700 (£50,270 - £12,570) and 40% tax on £9,730 (£60,000 - £50,270). If the allowance rose by £1,000, your 20% band would shift, and you would save £200 per year. The benefit of a Personal Allowance increase is generally felt equally across basic and higher rate taxpayers, up until the point the allowance is tapered away for high earners (above £100,000).

This is a hypothetical illustration, but it demonstrates how even a modest adjustment could put hundreds of pounds back into the pockets of working individuals.

But There Are Risks: Funding the Change

While a rise in the Personal Allowance would be welcomed by many, the fiscal implications are significant. The OBR's projections highlight the substantial revenue currently generated by the freeze. Reversing this policy would mean foregoing billions in future tax receipts. If Mr. Burnham is committed to not raising headline rates of income tax, VAT, or National Insurance, and adhering to fiscal rules, the question of how to fund such a move becomes paramount.

His hints about "asking for a little more" from wealthier households suggest potential changes to other parts of the tax system, perhaps targeting capital gains or other forms of wealth, to offset the cost of increasing the Personal Allowance. This would represent a significant rebalancing of the UK's tax burden.

What this means for you

While a change to the Personal Allowance is not yet confirmed, understanding the current tax landscape and utilising available tax-efficient wrappers remains crucial for managing your personal finances effectively.

What to do right now

Given the current tax environment, where more of your income is likely to be taxed, it is prudent to review your savings and investments to ensure you are making the most of tax-efficient options:

• Cash ISAs: These allow you to save up to £20,000 per tax year completely free from UK income tax on interest. For any significant savings, a Cash ISA should be a primary consideration before a standard savings account.
• Lifetime ISAs (LISAs): If you are a first-time buyer aged between 18 and 39, a LISA offers a 25% government bonus on your contributions, up to a maximum of £1,000 per year on a £4,000 contribution. This is a powerful tool for saving for a deposit.
• Personal Savings Allowance (PSA): Remember that basic rate taxpayers can earn up to £1,000 in interest tax-free each year, while higher rate taxpayers get £500. Interest earned above these limits in standard savings accounts is subject to income tax at your marginal rate. For those with substantial savings, it's easy to exceed these limits, making ISAs even more attractive.

Many advisers recommend reviewing your financial arrangements annually, especially as tax thresholds remain frozen and inflation continues to impact the real value of your earnings and savings.

When Effective

Andy Burnham assumes office in July 2026. Any policy changes regarding the Personal Allowance would typically be announced in a future Budget or Autumn Statement and would likely come into effect at the start of the next tax year, which is April 6th. Therefore, the earliest such a change could realistically be implemented would be April 2027.

Where to get help

For personalised guidance on your tax affairs and financial planning, consider consulting an independent financial adviser. You can also find general information and tools on the official HMRC website.

This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.

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