The tax-free Personal Allowance could rise to £15,570 under Andy Burnham, with Capital Gains Tax increased to fund the change, according to Budget speculation reported by The Telegraph and Sky News.
The allowance has been frozen at £12,570 since 2021 and has not had a significant increase since 2019. Former Chancellor Rachel Reeves extended the freeze until 2031, meaning it would have remained at the same level for a decade.
Fiscal drag and the proposed change
The allowance determines how much a person can earn before paying Income Tax, which is charged at 20% on every £1 earned above the threshold. As wages rise annually to counter inflation, more people are dragged into higher tax bills because the threshold stays the same, a phenomenon known as 'fiscal drag'.
The reported plan would take the threshold to just below the level it would have been had it not been frozen in 2021. It would also partially address the demands of a petition first reported by the Express, which has attracted more than 40,000 signatures.
Capital Gains Tax as the funding source
Capital Gains Tax is levied on gains from assets, such as the increased value of a second property when sold, or profits from stocks and shares. The plan to raise the allowance and increase CGT was reportedly put forward by Labour donor and Ecotricity owner Dale Vince.
Susannah Streeter, chief investment strategist at Wealth Club, described the potential tax changes as a 'tricky tightrope' that could have a knock-on effect on investing. The timing is notable because cuts to Cash ISA limits, introduced by ex-Chancellor Reeves, were intended to encourage more investing.
Investor caution advised
Ms Streeter said: "Tax speculation is ramping up ahead of the Budget, especially given the latest snapshot of the government coffers shows Prime Minister Andy Burnham and Chancellor John Healey are walking an increasingly tricky tightrope when it comes to the public finances."
She added: "That is prompting fresh speculation about a potential increase in Capital Gains Tax, particularly if reported plans to raise the personal income-tax allowance from £12,570 become a reality. If the government is looking to put more money into people's pockets by reducing their income-tax bill, it would need to find the money elsewhere, and CGT is increasingly being talked up as a potential source. For investors, the prospect of a higher CGT bill could mean some simply decide not to sell assets and hang onto them instead."
Ms Streeter cautioned against panic among investors, saying: "The old adage – don't let the tax tail wag the investment dog – should still be adhered to when it comes to a broad investment strategy. After all, too much switching and ditching stocks on rumour and speculation can prove highly detrimental over the longer term. However, it's always worth having a portfolio review, especially if you are an experienced investor, to assess whether you are not making the most of tax shelters designed to boost growth and reward you for taking a risk on nascent British companies."
