The tax-free personal allowance has been frozen at £12,570 since April 2021, and Chancellor Rachel Reeves extended the freeze to 2031, dragging millions into higher taxes as wages rise. This freeze has already cost the average basic-rate taxpayer around £700 a year, according to Charlene Young, senior pensions and savings expert at AJ Bell.
If the personal allowance had kept pace with inflation, it would now be just over £16,000, Young said. If the freeze continues until 2031, the average basic-rate taxpayer could be around £960 a year worse off, depending on inflation and wage growth.
Cost of raising the allowance
Increasing the personal allowance by £500 would save basic-rate taxpayers £100 a year, but HMRC estimates every £100 increase costs the Treasury around £1 billion a year, so a £500 rise would leave a £5 billion hole in public finances. Restoring the allowance fully with inflation could cost around £35 billion a year, making it difficult to deliver while the Government is balancing the books.
Andy Burnham has suggested he might increase the allowance, but the numbers may have prompted a quick U-turn.
Higher earners face tax trap
Anyone earning more than £100,000 starts losing their personal allowance, creating a 60% effective marginal tax rate on income between £100,000 and £125,140 in England and Wales, with additional rate tax at 45% above that.
Young noted that the starting limit for the taper has been frozen since 2010, which is often overlooked.
Alternatives to raising the allowance
Cutting National Insurance by one percentage point would cost around £5.8 billion but could save someone earning £35,000 roughly £225 a year, compared with £100 from a £500 personal allowance increase. However, that wouldn't help pensioners, who don't pay NI, making it a politically difficult choice.
The personal allowance is the same in Scotland, but tax bands are higher, including a top rate of 48% on income above £125,140. Burnham has previously suggested raising the additional rate to 50%, but higher rates don't always raise expected revenue, as workers might turn down promotions.
Scottish tax concerns
Rathbones has warned that Scotland's higher and more complex income tax system is encouraging some better-paid workers to consider living in England and commuting north. Gordon Lawrie, head of Rathbones' Edinburgh office, said high earners regularly ask whether they can work in Scotland while living in England. "For someone earning £250,000, the difference could exceed £46,000 over five years."
Scottish taxpayers in the personal allowance taper face an effective marginal tax rate of 67.5%. Higher taxes can weaken competitiveness, discourage investment, and slow growth, and pushing them too high risks making everyone poorer.
