Chancellor John Healey will deliver his Budget next week, and speculation is growing over whether he will announce changes to the personal allowance. The personal allowance is the amount you can earn before paying income tax; it has been frozen at £12,570 since 2021 and is set to remain at that level until 2031.
Freezing tax thresholds means more people are dragged into paying tax for the first time, or into a higher rate, as their earnings rise. This is known as fiscal drag, or a stealth tax, because it lets the government collect more tax without raising rates.
What is the personal allowance?
The personal allowance is how much most people can earn before paying income tax. For the current tax year, the allowance is £12,570, and you pay 0% income tax on earnings up to this amount.
For earnings between £12,570 and £50,270, you pay the basic 20% rate. The higher 40% rate applies to earnings between £50,270 and £125,140, and the additional 45% rate kicks in above £125,140.
Will the personal allowance be increased?
The Telegraph reports that the Government is considering raising the personal allowance to £15,570. The idea comes from a proposal by Labour donor Dale Vince, who has donated £6 million to Labour since 2013 through his business, Ecotricity. The proposal suggests funding the increase by raising Capital Gains Tax and ending Bank of England interest payments on commercial bank reserves.
However, John Healey this week dismissed calls from some Labour MPs to increase Capital Gains Tax. Basic rate income taxpayers are charged Capital Gains Tax at 18%, while higher and additional rate taxpayers pay 24%.
A Treasury spokesperson told the Mirror: “As has always been the case, decisions on tax are a matter for the Chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”
How much would the allowance be worth now?
Analysis by investment platform AJ Bell shows the personal allowance would be worth about £16,072 for the 2026/27 tax year, and £17,380 by 2029-30, had it kept up with inflation. Raising the allowance by £500 could save basic rate taxpayers £100 off their annual tax bill, according to AJ Bell.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “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 £5billion.”
The Institute for Fiscal Studies (IFS) estimates that reinstating annual inflation-linked increases from April 2027 would cost the government approximately £8.4 billion per year.
How to cut your tax bill
Sarah Coles, head of personal finance at AJ Bell, suggests making extra pension contributions could help bring you down a tax bracket if you are particularly near the next threshold. Upping pension contributions may reduce your adjusted net income and bring you back below the next bracket. She added: “It’s worth checking if your employer will match any additional contributions into your workplace pension, to super-charge your efforts.”
Marriage tax allowance lets you transfer £1,260 of your personal allowance to your husband, wife or civil partner, reducing their tax by up to £252 in the current tax year. Claims can be backdated by four tax years. To qualify, one partner must be a non-taxpayer and the other must pay the basic 20% rate of tax.
Clare Stinton, senior personal finance analyst at Hargreaves Lansdown, said: “Tying the knot unlocks financial advantages – in particular, tax perks. Benefits that unmarried couples simply don’t have access to, no matter how long they’ve lived together, regardless of shared bills, or whether they have children.”
Finally, an ISA can protect your savings, especially if you have earned enough in savings interest to be near the tax threshold. Basic 20% rate taxpayers can earn up to £1,000 in savings interest each tax year before paying tax, higher rate taxpayers up to £500, while additional rate taxpayers receive no allowance.
