Burnham Signals Major Shift on Income Tax: Personal Allowance Could Rise
New Prime Minister Andy Burnham has put the nation on notice that a significant income tax cut may be on the horizon. In his first days in office, Burnham has indicated that the personal allowance—the £12,570 threshold at which workers begin paying income tax—is under active review. The hint came as part of a broader signal that the new government intends to tackle the ongoing cost-of-living crisis head-on, with the PM telling The Times that the frozen allowance was “the thing I heard the most on the doorsteps” during the recent Makerfield by-election.
The personal allowance has been frozen at £12,570 since April 2021, a policy first introduced by former Prime Minister Rishi Sunak and extended by Chancellor Rachel Reeves through to 2031. This freeze, a form of fiscal drag, has quietly pulled hundreds of thousands of additional workers into paying income tax for the first time, while pushing others into higher tax brackets as wages have risen with inflation. Burnham’s comments suggest a potential reversal of that policy, raising the possibility of a significant tax cut for basic-rate taxpayers as early as the next fiscal year.
What Has Burnham Said?
In an interview published over the weekend, the Prime Minister acknowledged the financial strain on households. “It’s challenging for people and it’s people on the lowest incomes perhaps who’ve most been affected by that,” he said. “So it’s an issue that I’m just kind of showing I have a visibility of the issue.” He stressed that changing the threshold “is not without significant consequences,” but explicitly stated he is “looking at it.”
Crucially, Burnham did not rule out reintroducing the 50p top rate of tax for high earners, a move that could help offset the cost of a personal allowance increase. This dual approach—potentially cutting tax for lower earners while raising it for the wealthiest—has already sparked debate across the political spectrum. The PM framed this as a matter of fairness, telling The Times that those who characterise him as merely a “tax raiser” are oversimplifying a complex fiscal picture.
The Stakes: Why the Personal Allowance Matters
The personal allowance is the cornerstone of the UK’s income tax system. For the 2026/27 tax year, workers can earn up to £12,570 before paying a penny in income tax. Any income above that is taxed at 20% (basic rate), then 40% (higher rate) above £50,270, and 45% (additional rate) above £125,140.
Since the allowance was frozen five years ago, it has not kept pace with inflation. According to analysis from Tax Policy Associates, if the personal allowance had risen in line with CPI inflation since 2021, it would now stand at approximately £16,070. That £3,500 gap means a basic-rate taxpayer is effectively paying an extra £700 per year in tax compared to what they would owe under a pre-freeze indexing system.
Fiscal Drag: A Quiet Tax Rise
The freeze is a textbook example of fiscal drag—a mechanism where tax thresholds remain static while wages and prices rise. Because nominal incomes increase over time, more people cross the threshold into tax liability, and existing taxpayers see a greater proportion of their income subject to tax. The Office for Budget Responsibility has estimated that the freeze on all income tax thresholds has raised tens of billions of pounds for the Treasury since its introduction, effectively acting as a stealth tax on working households.
For a worker earning the UK average salary of £35,000, the current taxable income is £22,430. A rise in the personal allowance to, say, £13,050—which would correspond to a CPI-linked increase using September 2025 inflation of 3.8%—would reduce taxable income to £21,950, saving that worker roughly £96 per year. While modest on an individual level, the cumulative impact across millions of households would be substantial, and politically potent.
How Much Could the Allowance Rise?
While Burnham has not committed to a specific figure, two leading scenarios have emerged from economic modelling. The first and most straightforward would be to lift the personal allowance in line with CPI inflation, using the September 2025 figure of 3.8%. This would raise the threshold to around £13,050, providing a small but tangible benefit to 20p-rate taxpayers.
The second, more generous option would be to align the personal allowance with the state pension triple lock policy, which guarantees increases by the highest of inflation, average earnings growth, or 2.5%. Given that average earnings have been growing at roughly 5% in recent quarters, this could push the allowance closer to £13,200. Either change would take effect in April 2027, assuming it is announced in the Budget expected later this year.
The Cost to the Treasury
Raising the personal allowance is expensive. According to expert estimates, a £500 increase in the threshold—taking it to £13,070—would cost the Exchequer around £6 billion per year. That is money that otherwise funds public services, and Burnham has been clear that the government’s financial position is “difficult.” The PM has already announced a £500 million cost-of-living package that includes a cap on bus fares at £2, and he earlier removed VAT from household electricity bills—a policy detailed in our article on Burnham VAT Cut on Home Electricity Bills: What EV Drivers Need to Know.
Offsetting these costs likely means revenue-raising measures elsewhere. The most discussed option is the return of the 50p additional rate for incomes over £150,000, which could raise an estimated £2-3 billion annually. Burnham’s refusal to rule this out in recent media appearances suggests it is firmly on the table. Critics argue this could disproportionately hit high-earning professionals in London and the South East, potentially dampening investment and talent retention.
Perspectives: The Case for and Against
Why Raise the Personal Allowance?
Proponents, including many Labour backbenchers and anti-poverty campaigners, argue that increasing the personal allowance is the most effective way to protect low-income workers from tax. It keeps the poorest households out of the income tax system entirely, reducing the burden on those least able to pay. It is simple, easy for taxpayers to understand, and politically popular.
Burnham himself has framed this as a matter of listening to voters. The freezing of allowances was a recurring complaint on the campaign trail, and delivering a rise would honour a key electoral promise. It would also complement his existing cost-of-living measures, such as the bus fare cap and the VAT cut on energy bills.
Why Cut National Insurance Instead?
Not everyone agrees. Dan Neidle of Tax Policy Associates has argued that the same £6 billion would be better spent cutting National Insurance (NI) rather than raising the personal allowance. His reasoning: a personal allowance rise benefits all basic-rate taxpayers equally, giving each about £140 per year. An NI cut of similar cost would provide a larger benefit to median earners—around £265 per worker—and would not create the same distortions in the tax system.
One such distortion is the tax trap at £100,000. When the personal allowance rises, it interacts with the income threshold at which the allowance begins to be withdrawn (currently £100,000). For every £2 earned above £100,000, the allowance is reduced by £1, creating an effective marginal tax rate of 62%. Raising the allowance widens this “penalty zone,” disincentivising higher earnings and career advancement for middle-income professionals. Neidle and the Centre for British Progress have proposed eliminating this cliff edge entirely, potentially on a cost-neutral basis, by smoothing the taper.
The Political Calculus
Burnham’s position is delicate. He must balance the demands of his party’s left wing, which wants significant tax increases on the wealthy, with the centrist and business-friendly wings that favour lower taxes on earnings and investment. His decision on the personal allowance will be a key test of his governing style.
The PM has also signalled that he will not call an early general election, giving himself breathing room to implement potentially unpopular fiscal measures. However, with the economy still fragile and household budgets tight, the pressure to deliver a visible “dividend” to ordinary workers is immense.
What This Means for Your Finances
For the average worker, a rise in the personal allowance would mean a slightly larger pay packet from April 2027. The exact amount depends on the final figure chosen, but even a £500 increase would put an extra £100 per year in the pocket of a basic-rate taxpayer. Higher-rate taxpayers would also benefit, though the savings are smaller proportionally.
Crucially, any change will not take effect until the start of the next tax year. Meanwhile, the freeze remains in place, and workers should not expect any immediate relief. Burnham has stressed that the Budget will examine all options, and that the financial situation is constrained.
For those trying to plan their finances, it is worth noting that the personal allowance is just one component of the tax system. National Insurance thresholds, capital gains tax allowances, and pension tax relief rules could all be subject to change under the new government. Savers and investors should watch for announcements in the autumn Budget.
The Broader Picture: A New Fiscal Era?
Burnham’s tax signals represent a potential departure from the austerity-adjacent policies of the previous government. By unfreezing the personal allowance, he would be effectively reversing a key component of the fiscal consolidation strategy pursued since 2021. This is a bet that lower taxes for low- and middle-earners can stimulate economic activity and improve living standards without blowing a hole in the public finances.
However, the arithmetic is challenging. The Office for Budget Responsibility’s latest forecasts show public debt at over 100% of GDP, and the costs of an ageing population, climate change, and defence commitments continue to rise. Any tax cut must be paid for, either through higher taxes elsewhere, lower spending, or increased borrowing. Burnham’s openness to a 50p top rate suggests he is leaning towards the first option.
The coming months will reveal whether this approach can command support in Parliament and among voters. For now, millions of taxpayers are watching closely, hoping that the “tangible improvement” Burnham has promised will soon become a reality.
This article contains analysis of proposed policy changes. Tax rules are subject to change, and individual circumstances vary. Always consult a qualified financial adviser for personal tax advice.
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