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As Andy Burnham steps into his role as Prime Minister, he has signalled a focus on alleviating the financial pressures facing households across the UK. One of his key proposals is to review the tax-free personal allowance, which has remained unchanged for five years. As many Britons grapple with the rising cost of living, the potential increase in the personal allowance could offer much-needed relief, especially for basic rate taxpayers.
The Current Landscape of the Personal Allowance
The personal allowance—the portion of income that individuals can earn before they incur tax—has been set at £12,570 since 2021. This stagnation has resulted in many individuals being swept into the tax system or pushed into higher tax brackets due to what’s known as fiscal drag, where inflation and wage growth outpace tax thresholds.
Burnham has expressed a desire to rectify what he perceives as the negative economic impacts of previous administrations, particularly those stemming from policies dating back to the Thatcher era. During his campaign, he highlighted that the personal allowance threshold was a pressing concern for many voters, particularly in areas like Makerfield, where he engaged directly with constituents.
Potential Changes to the Personal Allowance
Although specific details on Burnham’s plans are still forthcoming, he could opt to adjust the personal allowance based on the Consumer Price Index (CPI) inflation rate or align it with the state pension’s triple lock mechanism, which provides for annual increases based on wage growth, inflation, or a base figure of 2.5%.
If Burnham chooses to increase the personal allowance in line with the CPI inflation rate of 3.8% from September 2025, it would rise to approximately £13,050. For a basic rate taxpayer earning £35,000, this change would reduce their taxable income, resulting in a saving of roughly £96 annually. Additionally, if National Insurance contributions are also adjusted, the total benefit could amount to £134.40 per year.
The Economic Implications
While these potential savings may seem modest, they could significantly impact the financial wellbeing of around 40 million Britons who fall within the basic tax rate bracket. Personal finance expert Kate Steere notes that while the increase may not transform lives, any untaxed income will likely be welcomed by individuals facing rising expenses.
However, there are broader economic considerations at play. The Treasury could face a significant loss of revenue—estimated between £4.5 billion and £5.5 billion annually—if these changes are enacted. This loss may necessitate compensatory tax increases elsewhere, potentially affecting higher earners or leading to changes in local taxation policies.
Burnham has previously suggested reforming council tax in favour of a property-based tax, a proposal that could offset the fiscal impacts of raising the personal allowance. Such a shift could, however, be met with resistance from homeowners concerned about increased financial burdens.
Why it Matters
Burnham’s proposed changes to the personal allowance underscore the ongoing struggle to balance fiscal responsibility with the urgent need for financial relief among ordinary citizens. As the cost of living continues to rise, particularly amid inflationary pressures, the effectiveness of any tax adjustments will be closely scrutinised. The outcome may not only shape the financial landscape for millions but could also define Burnham’s reputation and effectiveness as Prime Minister in addressing one of the most pressing issues facing the nation today.
