Key facts
- UK savers are urging Chancellor John Healey to end the freeze on the personal allowance.
- The personal allowance has been frozen at £12,570 since 2021.
- If the allowance had kept pace with inflation, it would now be above £16,000.
- A £500 increase to the tax-free allowance would save a basic-rate taxpayer £100 a year.
- Every £100 increase in the personal allowance costs the Exchequer around £1 billion a year.
- The higher-rate tax threshold, frozen at £50,270, would be above £64,000 if inflation-linked.
UK savers are calling on Chancellor John Healey to unfreeze the personal allowance in his upcoming Autumn Budget, a move that could provide a tax cut but comes with significant costs for the Treasury. The personal allowance, which is the amount individuals can earn before paying income tax, has been frozen at £12,570 since 2021. Analysts at AJ Bell suggest that if the allowance had kept pace with inflation, it would now be over £16,000. This freeze has acted as a "stealth tax," pushing more people into higher tax bands as wages have increased.
Prime Minister Andy Burnham has indicated a willingness to address the frozen personal allowance to ease cost of living pressures. A modest increase, such as £500, could save a basic-rate taxpayer £100 annually. However, experts caution that such a move would be financially challenging for the government, especially after recent costly pledges. Each £100 increase in the personal allowance is estimated to cost the Exchequer approximately £1 billion per year.
Furthermore, the higher-rate tax threshold, currently at £50,270, has also been frozen. AJ Bell notes that this threshold would be over £64,000 today if it had been linked to inflation, meaning higher earners are paying significantly more tax than they would otherwise. The firm warns that any increase to the personal allowance might be perceived as a "false dawn" unless it is meaningfully increased and indexed to inflation again.