Prime Minister Andy Burnham is under pressure to unfreeze the personal allowance, which has been frozen at £12,570 since 2021. Analysis by investment platform AJ Bell reveals it would be worth about £16,072 for the 2026-27 tax year and £17,380 by 2029-30, had it kept up with inflation.
What is the personal allowance?
The personal allowance is how much most people can earn before they start to pay income tax. When you earn above this amount, you pay the basic 20% rate of income tax. The higher 40% rate applies on earnings above £50,270, while the additional 45% rate kicks in when you start to earn more than £125,140.
- Personal allowance - up to £12,570
- Basic rate (taxed at 20%) - £12,571 to £50,270
- Higher rate (taxed at 40%) - £50,271 to £125,140
- Additional rate (taxed at 45%) - over £125,140
Impact of the freeze
The freeze has led to more people being dragged into paying tax for the first time, or a higher rate of tax, as their earnings increase. The personal allowance is currently set to be frozen until at least 2031. The new PM previously acknowledged that voters were frustrated over the freeze but also admitted that any change would be "difficult given the financial circumstances in which we find ourselves". On Wednesday, Mr Burnham said there is "no commitment at this point to change" but said it could be looked at later this year in the Budget. The new Chancellor John Healey has not yet set a date for the Budget.
How much would the personal allowance be worth now?
Charlene Young, senior pensions and savings expert at AJ Bell, said: "Had it tracked inflation, as measured by September CPI in previous years, the personal allowance would sit at just over £16,000 today. That means it is already costing most taxpayers around £700 a year. If the freeze did continue until the end of 2030/31 a basic rate taxpayer stands to be around £960 worse off, although the exact amount will depend on wages and inflation in the interim." But even if the personal allowance is unfrozen, Ms Young warned it is unlikely to be restored to its threshold in real terms. She added: "Unless the threshold is meaningfully increased and the personal allowance indexed to inflation again, taxpayers may be left feeling that a brief ray of sunshine in the end is a false dawn."
How much more money would you get if the personal allowance was unfrozen?
AJ Bell says raising the personal allowance by £500 could save basic rate taxpayers £100 off their annual tax bill. Ms Young added: "The more it’s hiked, the bigger the potential tax saving, and the bigger the fiscal hole Healey needs to fill. HMRC estimates that every £100 increase in the allowance costs around £1 billion a year on average, meaning a £500 hike could cost around £5 billion."
